Until last year the import of laundry detergent was prohibited. There was perfect competition in the local market and the equilibrium was at a price of P₀. This year the prohibition was removed and laundry detergent can be imported from abroad. The global price of laundry detergent (in terms of local currency) is P₁, which is lower than the price in the local market (P₀> P₁). (Assume that the freight costs are trivial).

a.What does the laundry detergent supply in the local market look like after import has been permitted? Explain.

b.How will the equilibrium in this market change in comparison to the original conditions? Show what will happen to the quantity produced in Israel, to the quantity consumed in Israel and what is the quantity that is imported.

c.Who loses and who gains from opening the market to imports from abroad? What happened to the total surplus? Explain.