Compulsory question. Please make use of both algebraanddiagramsinordertoillustrateyouranswers.

ConsiderthemarketofTimTamsinAustralia(asmallcountry).TheworldpriceofTimTams is$5.

The quantity demanded in Australia is q_d= 40 2p

The domestic supply is q_s=2p where p is the price of Tim Tams

(a)i)CalculatetheAustraliantheequilibriumprice,quantity,consumersurplusandproducer surplus under autarky (no trade). (1mark)

ii)SupposethatafterBrexit,AustraliaremovesabanoninternationaltradeofTimTams madeintheUK(therestoftheworld).Withtheaidofawell-labelleddiagram,calculate thenewequilibriumprice,thequantityconsumedandthequantitysuppliedbydomestic producers. (2marks)

iii)Calculate the change in consumer surplus and producer surplus from i) to ii). Is the original ban of international trade in Tim Tams efficient? Why or why not? (2marks)

(b)After the Australian government has removed the ban on international trade, it then implements an import tax (tariff) of $2. Again, with the help of a well-labelleddiagram,

(i)calculate the new quantity demanded, quantity supplied domestically,and

(ii)the new consumer surplus, producer surplus and government revenue following the imposition of the tariff. (3marks)

(c)The government, instead of the import tax, considers implementing a $2 per unit pro- duction subsidy for domestic producers. What are the new consumer, producer surplus, and the cost of the subsidy to the government? (3marks)

(d)You are hired as an economic consultant by the Australian government. What is your rankingofthethreealternativepoliciesoutlineinpartsa)ii,b,andc(thatisfreetrade, a tariff and a production subsidy)? Why? (2marks)