Australian demand and supply for rice are given by:

d=40

s = 2 + 10

whereQDis the domestic quantity demanded,QSis the domestic quantity supplied in millions of kg

andPis the domestic price in dollars per kg.

1. (a)Calculate the domestic equilibrium price and quantity if no imports of rice are allowed into Australia. Draw a diagram to illustrate this equilibrium. (Note: keep in mind when drawing the diagram that you will need to add to it in the following parts of the question) (4 marks)
2. Suppose the world price for rice is $4 per kg. Add the world price to the diagram that you used to illustrate the domestic equilibrium. Assume the government allows free trade in rice. How much rice is consumed in Australia? How much is produced in Australia and how much is imported? Calculate and explain the changes in consumer and producer surplus caused by the free trade policy. (8 marks)