Question 5

Suppose that domestic demand and supply for shoes in a small open economy characterized by perfect competition are given by:

P = 100 -2Q (demand)

P = 4 + Q (supply)

where P measures price and Q volume.

(a)

What are the autarky equilibrium price and quantity? What are the levels of autarky consumer surplus, producer surplus, and national welfare?

If you like, show in a figure.

(b)What are the levels of domestic production, consumption, and imports if the world free trade price is 10and there are no barriers to trade?

If you like, show in a figure.

(c)What are the levels of free trade consumer surplus, producer surplus, and net national welfare?

(d)Suppose now that a tariff of 10 is added to the free trade price. What is the welfare loss caused by the tariff?

If you like, show in a figure.

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