Question
Q1) Suppose Demand in the rich country is P=100- 2Q and supply is P=2Q. Draw this demand and supply diagram in 'autarky' - a closed
Q1) Suppose Demand in the rich country is P=100- 2Q and supply is P=2Q. Draw this demand and supply diagram in 'autarky' - a closed economy where no imports or exports are possible - with the standard axes (P vertical, Q horizontal). Mark carefully on the diagram the demand curve (1 mark), the supply curve (1 mark), and then work out the equilibrium (show working out and the numbers, not just the point) (2 marks)
Question 2 Mark on a new diagram a world price of 30 (1 mark); explain why no goods will be bought or sold at the autarky price (1 mark); how much is demanded at price 30? (1 mark); how much is supplied? (1 mark); explain what happens to the difference between supply and demand at that price (1 mark).
Question 3 Consider that we are in a situation of a negative consumption externality in country A with a constant value of -10 for every unit consumed. (a) Compute welfare for country A in autarky (1 mark). (b) Compute welfare for country A under free trade (1 mark). Does welfare increase or decrease with free trade (1 mark)? Which agents (consumers, producers) in country A would advocate for free trade (over autarky) (1 mark)? Why (1 mark)?
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