1. Consider the effects of a US trade agreement on the market for purple pants in the United States. Suppose that the US has had a quota on purple pants equal to 40 units, which kept the US price $5 above the world price.

a) What if the U.S. were to eliminate its purple pants quotahow much would social welfare increase in the country in the movement from having the quota to free trade at the world price P_w? (Give your answer for the change in social welfare both in letters and in dollars, and use triangle and rectangle formulas for computing your answers that are in dollars.)

b) What if instead of eliminating its quota that under WTO rules, the US converts its quota on purple pants imports to an "equivalent tariff" of $5 per unit. What will be the net welfare change in the US from this policy move compared with the quota? (Give your answer both in letters and in dollars.) Given your answer, why is it that economists nearly always favor tariffs over quotas in trade policy?

c) What if instead of any of the above policies, the US decided to implement a producer subsidy of $5 on clothing. Measured in letters, what would be the resulting consumer surplus, producer surplus, cost of the subsidy, and total social welfare? How would this level of social welfare compare to that under free trade?

d) Rank the quota, tariff, and producer subsidy in terms of dollar value of the social losses they create in the importing country.

Supply A B Pw + 5 D E F Pw G Demand +20+404+20- 80 Purple Pants Supply A B Pw + 5 D E F Pw G Demand +20+404+20- 80 Purple Pants