1.Home demand and supply curves for wheat are:

D=100-20PS=20+P

2. Now add Foreign, which has a demand curve

D* = 80 - 20P

and a supply curve

S* = 40 + 20P.

a. Derive and graph Foreign's export supply curve and find the price of wheat

that would prevail in Foreign in the absence of trade.

b. Now allow Foreign and Home to trade with each other, at zero transporta-

tion cost. Find and graph the equilibrium under free trade. What is the world

price? What is the volume of trade?