1. Assume Australia is operating under free trade.

• World price $25
• Domestic production is 70
• Domestic consumption is 140.

Then, the government decides to move from free trade to a quota of 30.

• Domestic production after the quota is 90
• Domestic consumption after the quota is 120.
• Price after the quota rises to $50.

(a)Illustrate this on the graph.

Calculate the change in:

(b) CS

(c) PS

(d) Quota rent

(e) Total surplus

Show all workings, $ values and signs!

2. This question relates to the case study on the European Union's "Common Agricultural Study" we did in class.

Here is a recent article from the New York Times(also available as pdf in homework folder)

http://www.nytimes.com/2009/01/22/world/europe/22iht-union.4.19606951.html?_r=0

(a) Why has the European Union decided to intervene in the market for butter and skimmed butter?

(b) What impact will the policy in part A have on the market? Illustrate this with a diagram. Use the market for skimmed milk as a guide. Assume the equilibrium price is €1,000 per ton. At the price floor of €1,698 per ton, Qd is 91,000 tons; Qs is 200,000 tons. Illustrate the Qd, Qs and any shortage/surplus.

(c) The EU also uses export subsidies to help its famers. What impact does this have on: domestic production within Europe; (ii) farmers in developing countries?

Suppose that the domestic demand and supply for t-shirts in a small open economy are given by:

Qd = 170 - 2P
Qs = 50 + 2P

where Q denotes quantity and P denotes price. Show all calculations for full credit.

3. What is the autarky price and quantity of t-shirts produced?

4. Assume the world price of t-shirts is $25. If this country opens its market to free trade, what are the domestic production (supply), the domestic consumption (demand) and the quantity of imports?

5. Suppose that the country imposes a quota of 8 units. Find the new price after the quota is imposed. Compare the new price (with the quota) to the free trade price. By how much does the price rise after trade is restricted by the quota? What are the domestic production, the domestic consumption and amount imported with the quota?

6. Draw a Supply & Demand curve which shows all the information from Questions 3-5: autarky, free trade and impact of the quota on production, consumption, imports & price.

7. After the quota in Q5 is imposed, how has domestic welfare been affected? (Assume all quota rents go to domestic producers and calculate a value for the change in TOTAL welfare between the free trade outcome and the quota outcome.)

8. Suppose instead of the quota described in Q5 that this country negotiates a voluntary export restraint of 8 units with its chief foreign supplier. What are the welfare effects of this policy? (Calculate a value for the change in TOTAL welfare between the free trade outcome and the VER outcome).