Trade and Policy Perfect competition (Sec 10)

Question 1

A small country can import a good and pay a world market price of 20 MU each for it. The
domestic supply is given as 𝑥𝑆 = −25 + 2.5𝑝. The domestic demand is given as 𝑥𝐷 = 400 −
10𝑝.
a) Derive the equilibrium under autarky. In addition, calculate the consumer surplus and the
producer surplus as well as total welfare.
b) Derive the equilibrium under free trade. In addition, calculate the consumer surplus and the
producer surplus as well as total welfare.
c) Derive the equilibrium with an import tariff of 5 MU each. Compare total welfare and its
components with your results from b).

Answer 1

Answers in Tutorial 10 emails