A small country imports walnuts. The country's domestic demand curve D_dom is a downward-sloping straight line and the country's domestic supply curve S_dom is an upward-sloping straight line, as shown in the graph on the next page.There are no externalities that arise from producing, consuming, or importing walnuts.

The price of walnuts on world markets is $2.00 per kilogram.The best estimates are that with free trade domestic consumption would be 240 million kilograms per year, and domestic production would be 50 million kilograms per year.

The country's government does not permit free trade.Rather, the government currently has the following set of policies toward imports:

• The government imposes a tariff rate of 40% on walnut imports, and
• The government also imposes an import quota of 80 million kilograms of walnuts imported per year. The government has awarded the license rights to import the quota amount of walnuts to a set of established wholesalers in the country.There is no separate payment to the government for the license rights.(The walnut-importing firms do not themselves also produce walnuts.)

With these policies in place, the domestic price is $3.40 per kilogram of walnuts

Show graphically and explain this country's market for walnuts, contrasting the market if there is free trade with the market if the set of government policies (tariff and quota) is in place.In comparison with free trade, show graphically and explain the gainers and the losers in the country as a result of the set of government policies, and how much each group gains or loses.

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