After a country goes from disallowing trade in coffee with other countries to allowing trade in coffee with other countries,
A)the domestic price of coffee will be greater than the world price of coffee.
B)the domestic price of coffee will be lower than the world price of coffee.
C)the domestic price of coffee will equal the world price of coffee.
D)The world price of coffee does not matter;the domestic price of coffee prevails.

Question

Quizplus · Accepted Answer

When a country allows trade in coffee with other countries, the domestic price of coffee will eventually equal the world price of coffee through the process of arbitrage. If the domestic price of coffee is higher than the world price, then domestic producers will find it profitable to export coffee, which will increase the global supply of coffee and lower the world price. Conversely, if the domestic price of coffee is lower than the world price, then the country will import coffee, which will decrease the global supply of coffee and raise the world price. Eventually, these forces will converge to make the domestic price of coffee equal the world price.

After a Country Goes from Disallowing Trade in Coffee with Other