1)A small country has the following demand and supply curves for a good that can be imported at a world price of 10 per unit:

Demand:D= 500 - 8P

Supply:S= 50 + 20P

Suppose that each unit of production yields a marginal social benefit of 10.

a.Calculate the total effect on welfare of a tariff of 5 per unit levied on imports. (6 marks)

b.Calculate the total effect on welfare of a production subsidy of 5 per unit. (5 marks)

c.Why does the production subsidy produce a greater gain in welfare than the tariff? (2 marks)