Consider the country ABC that produces milk. The president of the ABC country allows free international trade and opens the milk market in ABC country to free international trade. In its equilibrium without trade, the domestic price of milk before trade is above the world price of milk. Now, for some reason, (e.g., could be because the milk producers in the United States face much lower cost of milk production because of technological progress) the world price of milk falls by $100.

Instructions:

• Illustrate in a graph the situation just described for the milk market in the ABC country. Your graph should show all the numbers: give sample numbers to prices, quantities.

• Analyze the welfare effects of free trade (e.g., calculate and show on the graph the change in consumer surplus, the change in producer surplus and the change in total surplus that results from the world price reduction).

Explain thoroughly with graph (only one graph is required that addresses all the questions in this exercise) + words.