In Iceland, the demand and supply of beef is described by the following demand and supply functions: (P represents price per unit in Euros, all examples in Euros): (Use exact calculations with one decimal place, do not round to whole numbers in all examples).

QD = 298 - 2P

QS = -1 + 2P

The world market price of beef is 20 Euros. per piece.

a) Calculate and draw balance on a picture:

i) If no trade with foreign countries is allowed.

ii) If a 24% VAT is imposed on domestic producers and trade with foreign countries is prohibited.

iii) How is the tax burden divided in point ii) and what are the explanations?

iv) If a proportional tax were imposed on consumers. What would the tax on consumer prices have to be that would bring the government the same revenue as before? Show the effect of such a tax on a diagram in comparison to a market without a tax.

b) Due to recent high inflation, the government has decided to stop the imposition of VAT on beef at the same time as they have decided to allow the importation of beef freely. Calculate domestic production, domestic consumption and imports. Draw a diagram and calculate the gains from the opening of trade (assuming there was no VAT before the freedom).

c) Domestic farmers have strongly protested the government's decision on free importation. Due to pressure from farmers' special interest groups, a decision has been made to impose a 25% toll on the world market price of imports.

i) What will be the price, import, demand and domestic supply.

ii) How does producer and consumer benefit change from point b)?

iii) What will be the macroeconomic loss due to tolls compared to free trade (without VAT)?

d) Due to further domestic pressure, the decision on customs duties has been changed, the previous customs duties are withdrawn, but customs duties will now be 120% of the world market price (no VAT).

i) What will be the price, imports, demand and domestic supply in the new equilibrium?

ii) What will be the macroeconomic loss due to the super toll compared to free trade without VAT?