US is a large country in the olive oil market. In a free trade equilibrium it imports 180 tons of olive oil at a price of 30 $/tonne. Under political pressure from local farmers, the US government considers introducing a policy that would increase domestic olive oil production. Throughout this exercise assume that the supply and demand curves in the US are linear.

(a) Suppose US government introduces an import quota of 100 tonnes of olive oil. The import licenses are sold by the government in a fair auction. Evaluate the effect of this policy on US welfare (relative to free trade) by taking the following steps:

(i) Illustrate the effect of the policy on the domestic market and the international market using appropriate graphs.

(ii) Qualitatively (no numbers needed) describe the effects on consumer surplus and producer surplus and show them in the graph.

(iii) Calculate the effect on government revenue and illustrate it in the graph.

(iv) Calculate the net effect on Home country's welfare. Relate your calculation to the graph.