Most Canadian dairy farmers oppose free trade, and most Canadian lumber producers support it. For simplicity, assume that Canada is a small country in the markets for both milk and lumber, and that without free trade, Canada would not trade these goods internationally. (Both of these assumptions are false, but they do not affect the qualitative responses to the following questions.)

a)Based on who opposes and who supports free trade, do you think the world milk price is above or below the Canadian no-trade milk price? Do you think the world lumber price is above or below the Canadian no-trade lumber price? Now analyze the welfare consequences of free trade for both markets.

b)Using appropriate graphs, illustrate what happens to: Consumer surplus, Producer surplus and Total surplus in each of the two markets before and after trade is allowed.

c) Considering both markets together, would free trade make Canadian producers as a group better off or worse off? Would it make Canadian consumers as a group better off or worse off? Does it make Canada as a whole better off or worse off?