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Demand and supply functions

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Question 1 : Consider Island a small exporting country with the following demand and supply functions and the free-trade world price $12 per unit.

D = 100 - 5P and S = 10P - 50

A. In the absence of any barriers to trade, what are the domestic consumption and production? How much is exported?

B. Suppose the Island government offers the exporters an export subsidy of $3 per unit. In addition, the government imposes a tariff of $3 per unit on imports. Calculate the price paid and quantity demanded by Island consumers.

C. Draw a graph and calculate the net effect of the export subsidy on Island welfare.

Question 2 (5 points): Now, suppose that Island is a large exporting country with the following demand and supply functions and the free-trade world price is $5,000 per unit.
D = 900,000 - 150P ; S = 100,000 + 50P

Island government offers an export subsidy that increases the domestic market price to $5,500 and lowers the world price to $4,500. However, starting next month, the Island government will be removing the export subsidy in compliance with the latest international trade pact.

-What is the impact of the removal of the subsidy on domestic consumers?
-What is the change in producer surplus due to the movement to free trade?
-What is the net effect of moving to free trade on Island welfare?
-What happens to Island's TOT? Explain.
-Would Island consumers support or oppose the policy for free trade? What about producers? Explain.

Reference no: EM132548753

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