Consider the demand and supply curves in Exercise 13.

DATA FROM EXERCISE13

Suppose that the domestic demand and supply for shoes in a small open economy are given by.

where P denotes price and Q denotes quantity.

a. What will be the levels of production and consumption under free trade?

b. Will the country be an exporter or an importer if the world price is \($50?\) How much will it want to trade?

c. Suppose that the local government imposes a tax of \($5\) per unit on the quantity traded of this product. What will happen to the production, consumption, and trade levels of this product?

d. What will be the welfare costs of this policy?

Transcribed Image Text:

P P 80 2Q (demand) 8+Q (supply)