Consider the following two-country model of the market for spinach. All producers and consumers take the price of spinach as given. Home's supply curve for spinach is given by

=5+

where is the quantity supplied by Home producers in millions of tons and P is the price in dollars per ton. Home's demand curve is given by =100,

where is the quantity demanded in Home. Foreign's supply and demand curve are given by: =2

and =100, respectively.

a) Derive the Home import demand curve and the Foreign export supply curve for spinach, and

use them to find the free trade equilibrium, including the world price of spinach and the quantity trade. Draw a diagram that shows this equilibrium.

b) Now, assume that Home imposes a $5 per ton import tariff. Show diagrammatically how this

shifts the import demand curve and changes the equilibrium. Compare the new world price and

domestic price for spinach in Home.

c) Does the tariff raise or lower Home's welfare? Show your calculations.

d) Now, suppose that Home does not impose any trade policy, but Foreign provides $5 per ton

export subsidy. Analyze the effects on the equilibrium, showing how the Foreign export supply

curve is shifted and how prices and trade quantities are affected.

e) Show the terms-of-trade effect in the Foreign welfare diagram. For which country is this a

benefit? For which country is it a loss?