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PROBLEM #7 [6 points]: Suppose that the world market for oil is very large. Further suppose that Canada is a small producer in the world
PROBLEM #7 [6 points]: Suppose that the world market for oil is very large. Further suppose that Canada is a small producer in the world market for oil and that the world market is perfectly competitive. Notice that S" and D' are the Canadian domestic supply and domestic demand, respectively. Let PW be the world market's equilibrium price for oil. Suppose that Canadian producers can produce to X1 units at or below the world price, P", and that beyond X1 units the Canadian producers can only supply oil at a price that is higher than P". Also, assume that at P" the demand for oil in the Canadia market is X2, where X2 > X1. For the purposes of your analysis, assume the original conditions in Canada are that there exists a bar on imports of good X and then the ban is lifted in favour of free trade. P SD A B C C G H PW SW D Q1 Q2 Q3 Oil a) Given the diagram above, complete the welfare analysis by filling out the table below. [3 points]
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