Country A has a competitive domestic market of charcoal. The demand and supply of the domestic market are given by

Q_D = 16 4P

Q_S = 4P

Country A has access to the international market, in which the charcoal price is Pw = 3. The domestic market is small and cannot influence the international price.

a) [3 marks] What will be the price at which charcoal is traded in the domestic market? What will be the quantity produced in country A and what quantity will be exported/imported?

b) [4 mark] Calculate the producer surplus and consumer surplus in country A, and illustrate them in a demand and supply graph.

c) [3 marks] Suppose charcoals price increases to P_W=4 in the international market. What are the quantity demanded and the quantity produced in country A? What quantity does country A export/import?

d) [5 marks] How does the price increase (from Pw =3 to Pw =4) change the consumer surplus and producer surplus in country A? Explain the changes in no more than 2 sentences.

e) [5 marks] When Pw =4, the government in country A decides to subsidize the domestic consumers x dollars for every unit they purchase. Suppose the government wants to achieve the same consumer surplus as when Pw =3. Calculate how much x must be to accomplish this. What is the export/import quantity given such a subsidy?