3: FREE TRADE:

Suppose FOREIGN's production supply curve rises (eg shifts right/down)

(2 points) a)

Show what happens to FOREIGN's ED-ES curve. Explain

(2 points) b)

What happens to free-trade prices, equilibrium output, consumption, and imports/exports

in each country. Show in a diagram and explain.

(3 points) c)

Does HOME surplus rise? Show and explain. EG identify what happens to consumer and

producer surpluses in Home. Relate to

Terms Of Trade

.

(3 point) d)

Does FOREIGN surplus rise? Show and explain. EG identify what happens to consumer

and producer surpluses in Foreign. Relate to the

Terms Of Trade

.