Q1: Suppose a new industry invokes the infant industry argument to request a subsidy. Assume this is granted but after five years, the benefits fail to outweigh the costs. Using diagrams discuss the following: a) Using a diagram, discuss the conditions that led this industry to ask for assistance (domestic supply and price, world price). (3 marks) b) Modify the diagram in (a) to explain the immediate effects of the subsidy (market and welfare). (3 marks) c) Modify the diagram in (b) to discuss the effects of a rise in world price in the future (market and welfare). (3 marks)

d) Explain how you would modify the diagram in (c) to depict the case where the actual net effect after five years (market & welfare effects) is better than expected. No need for a Diagram here. (4 marks)