Consider a closed, small economy where the domestic demand for x (assumed to be downward sloping) and the domestic supply of x (assumed to be upward sloping) determine the equilibrium price and quantity: p_x^*and x^*.

Provide your analysis with help of diagrams.

(i) Identify the consumer's surplus (CS) and the producer's surplus (PS) in a diagram. Assume that the international price for good x is p_Iassumed to be lower than p_x^*. (6 points)

(ii) As the country is open up for trade, good x can be imported from the international markets. Thus, the international price p_I becomes the new price consumers pay and producers receive. What would the effects of free trade on CS, PS and the welfare (W=CS+PS) be? Analyze with help of a diagram. (7 points)

(iii) For (ii), let the amount of import to be M. If the government decides to restrict the amount of import to M₀ where M₀< M, what will the effect of such a restriction on import be on social welfare relative to your answer in (ii)? (7 points)