Below is a diagram for the market for wine in Canada. There is a domestic residents wanting to buy wine. There is domestic supply curve of Canadian suppliers or producers of wine. In general, Canadian winers with lower costs of production are able to enter the market at lower expected prices than are producers with higher production costs. MARKET FOR WINE IN CANADA Price Domestic Wine Supply A Price Equilibran Before Trade World price a D E G world price l WPI H Domestic Demand G Gea Q3 Quantity of wine The Canadian equilibrium for wine is a PEQ and QEQ, both of which occurred before trade. 1. Canada decides to import wine as the world price, WP1, is below PEQ in Canada. Please fill in the table which shows the starting point of welfare measurements (prior to trade) and the subsequent value of welfare measurements after trade. Fill in the diagram below (1/2 point each) Table 1 Before Trade After Trade Change Consumer Surplus Producer Surplus Total Surplus Triangular Area equal to C, E, F, and G is known as the Gains from Trade area. All of this adds to Consumer surplus and to total surplus. 'After Trade' in Table 1 will be your starting place in Table 2 and Table 3.Quiz 3 in class Name_ 2. SCENARIO A: The world wine market had a worldwide price of WP1. However, there was a bad freeze in Europe that hurt European growers of wine and decreased the worldwide supply of wine. Now there is a new worldwide price for wine, WP2 above the first world price, but still below the Canadian equilibrium price of wine from domestic producers only. (1/2 point each) Table 2 Trade when WP1 Trade when WP2 Change Consumer Surplus Producer Surplus Total Surplus Questions to help you fill in Table 2 (you don't need to write them down- no points here): How did imports in Canada change, due to freeze in Europe? How did the area of Canada's gain from trade change? How were Domestic Suppliers affected? How were Domestic Buyers affected? What was the change in Total Surplus and how does it relate to the Gain from Trade area 3. SCENARIO B: Now let's start again, and there is no freeze in Europe, so we revert to a domestic supply and domestic demand again with importing at a WP1, the same starting place as in Table 2. Now the Canadian government decides to limit imports by putting a tax on the importers, also known as a tariff. Now complete another table, Table 3, which will have the same starting place as Table 2. The tariff will lower the effective price that importers will receive, since they will receive for Canada sales only the world price minus the amount of a tariff. To be able to compare the two situations - a freeze and a tariff , let's figure the price after the tariff is exactly the same as WP2. (1/2 point each) You can use the questions above (for Table 2) to help fill in Table 3, but change first question to 'due to a tariff' and remember now you have to consider government involvement Table 3 Trade when WP1 Trade when WP2 Change Consumer Surplus Producer Surplus Government Revenue Total Surplus What is difference in total surplus and why does it exist (2 points: 1 for change, 1 for reason) Exactly, how do changes in gains from trade in the tariff differ from any changes in gains to trade that occurred in the freeze scenario? ( 2 points for actual difference and 2 points for correct reason(s)