A specialized industrial compound is traded in a competitive world market where the world price is $8.00 per pound. Unlimited quantities are available for import into Canada at that price. The Canadian domestic supply is described by the equation Q = 0.75 P, and the Canadian domestic demand is described by the equation Q = 60 – 3 P.
a) Plot the domestic supply and demand curves
b) What is the price elasticity of demand at $12.00?
c) What is the price elasticity of demand at $8.00?
d) At what price does the industrial compound experience unit elasticity (ἠ = 1)?
e) With free international trade , what will be the Canadian
price? How much of the compound will Canadians demand and how much of that
demand will be supplied domestically versus from imports? Illustrate the outcome in a
diagram. Please add the world supply curve (SW) to the diagram reflecting the fact that “unlimited quantities” are available on the world market at $8.00 per pound.
f) If the government closed the Canadian market to all imports of the industrial
compound, what would be the equilibrium price and quantity?
g) If the world price rose to $20, how much would Canada consume, at what price and
how much of consumption would be supplied from Canada?
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