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uestion A1 Consider the following partial-equilibrium model where Home imports a product in the world market. Demand for this product at Home is QD=40-P, here
uestion A1 Consider the following partial-equilibrium model where Home imports a product in the world market. Demand for this product at Home is QD=40-P, here QD is the quantit)r demanded and P is the price paid by Home's consumers. Let domestic supply of this product be Q; = 2P-50, here Q3 is the quantity supplied at Home. Suppose initially that Home is able to import his product freely from Foreign, whose export supply function is XS=2Pw20, here X S is the quantity supplied and PW is the world price of the product. a) [7 marks] Calculate the world equilibrium values of PW and the quantity imported y Home. Fully illustrate this initial equilibrium in the world mrket. b) [6 marks] Now suppose Home imposes a quota of M = 12, which restricts total im- r'ts of the product to 12 units. Calculate the new price paid by Home's mnsumers as l] as the new world price, and fully illustrate them in your diagram from part (a). c) [7 marks] Use an appropriate diagram to fully explain the impact. of the quota on ome's welfare. You can assume that the import permits are allocated via a well-designed uetion that generates revenue equal to the quota rents. Note that you are only required identify the welfare change in the diagram and explain. You do not need to make any ' culations
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