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)

NOTE:

1. It is expected that you will draw diagrams for your use. You are, however, NOT expected to produce the diagrams as part of your answer.
2. If you provide components of your answer giving an indication of your correct steps towards calculations (for example, how you have arrived at your calculation of total welfare) you can expect partial marks, in the event your calculation turns out wrong.