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3. Consider a small open economy of Djibouti that produces coffee. Suppose the inverse demand and inverse supply curves in the economy are given by
3. Consider a small open economy of Djibouti that produces coffee. Suppose the inverse demand and inverse supply curves in the economy are given by the following equations: Demand: P = 182 30 Supply: P = 7 + 2Q where P denotes the price in Djiboutien franc (DJF) and Q d-otes the quantity in thousands of kilograms. i) What are the values of the consumer surplus (CS) and the producer surplus (PS) in autsrky'? (6 points) ii) Suppose the world price of eo'ee is DJF 50. Calculate the values of domestic pro- duction, consumption, and imports of mee in Djibouti. (6 points) iii) By how much does free trade change the values of the consumer surplus and the producer surplus you calculated in part (i)? (4 points) iv) Feeling unhappy about how free trade affects their prots, producers of coffee in Dji- bouti lobby their government for protection from foreign producers. The government responds by imposing a. specic tariff of DJF 10 on all coffee imports. a.) How much revenue does the government collect from the imposition of the tsriii? (6 points) b) The imposition of a tariff creates desdweight costs. What are the the two sources of the deadweight costs? Of the two, which one is more hurtful to the economy of Djibouti in this case? (10 points)
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