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1: EXTERNALITIES: FREE TRADE: Suppose Home opens to free trade at the prevailing Free Trade Price (PW). a) Illustrate the free-trade equilibrium output, consumption, and

1: EXTERNALITIES: FREE TRADE:

Suppose Home opens to free trade at the prevailing Free Trade Price (PW).

a) Illustrate the free-trade equilibrium output, consumption, and imports/exports for HOME. Just show in the diagram and discuss.

b) Identify the Gains From Trade. Explain.

c) Show and explain why Home can gain from free trade. Give the intuition.

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