If Freedonia changes its laws to allow international trade in software and the world price is lower than its domestic price,then it must be the case that
A)both consumer surplus and producer surplus increase.
B)consumer surplus increases and producer surplus decreases.
C)consumer surplus decreases and producer surplus increases.
D)both consumer surplus and producer surplus decrease.

Question

Quizplus · Accepted Answer

When Freedonia allows international trade in software and the world price is lower than its domestic price, domestic producers will face competition from foreign producers, causing them to reduce their prices. As a result, consumers in Freedonia will benefit from lower prices, leading to an increase in consumer surplus. On the other hand, domestic producers will suffer a decline in revenues and profits, resulting in a decrease in producer surplus. Therefore, the correct option is B, where consumer surplus increases and producer surplus decreases.

If Freedonia Changes Its Laws to Allow International Trade in Software