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i. Consider a small country who has no influence over the world price of rice and therefore takes it as given. Its domestic demand and
i. Consider a small country who has no influence over the world price of rice and therefore takes it as given. Its domestic demand and supply for this product are given as QD = 60 - 4P and QS = 4P - 12 respectively. a) Calculate the autarky (no trade) equilibrium price and quantity (ie where Qd=Qs). b) Assuming the world price of rice is $5 per kilogram, determine the free-trade quantity demanded, quantity supplied and imported. c) Now suppose that the Government imposes a tariff of $2 per kilogram. What is the new domestic price and quantity imported? Show using the appropriate diagram. d) Calculate the welfare effect of the tariff on consumers, producers, and the government. What are the overall welfare effects? Discuss whether this is an optimal policy for this country. ii. Often when countries remove tariffs, they do so via bilateral trade agreements which can result in trade creation or a simple change in trading partners. Using an appropriate diagram, discuss how trade diversion and trade creation generated by such an international trade agreement may generate different welfare effects
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