Suppose the world price of banana is P* and Ecuador decides to offer its banana exporters an export subsidy $s/unit. Use a graph of domestic demand- and supply-curves and:

(a) show the effect of the export subsidy on Ecuador's banana price, domestic supply, domestic demand, export quantity, consumer surplus, producer surplus, and government expenditure assuming Ecuador is a small country;

(b) identify Ecuador's net welfare change as a result of the export subsidy assuming Ecuador is a small country;

(c) Assuming a production subsidy is used instead, show the effect of the production subsidy on Ecuador's banana price, domestic supply, domestic demand, export quantity, consumer surplus, producer surplus, government expenditure and total welfare assuming Ecuador is a small country.

(d) Between export subsidy and production subsidy, which would be preferred by the consumers?

(e) Between export subsidy and production subsidy, which would be preferred by the domestic producers?

(f) Between export subsidy and production subsidy, which would be more desirable to the country?

Q3 (20 points) Suppose there are three countries, the U.S., Mexico, and Asia, in the world and the U.S. imports automobiles from either Mexico or Asia (or both). Assume that Mexico is a small supplier and Asia is a large supplier and the free-trade prices of automobiles from Mexico and Asia are PMEXICO=$12,000 and PASIA=$10,000, respectively, and the U.S. initially imposes a 15% tariff on both Mexico and Asia. Now the U.S. forms an FTA with Mexico.

1. Use a graph of import demand and export supply curves to show the impact of this FTA on U.S. consumer surplus, government revenue, and welfare. Is the U.S. better off or worse off with the FTA?
2. Show the impact of an alternative FTA with Asia on U.S. consumer surplus, government revenue, and welfare. Is the U.S. better off or worse off with the FTA