Econtopia is a small-open economy that produces two goods only: copper and gadgets. The following information about these two markets are given. The domestic market demand for gadgets is QD = 100 p and the domestic market supply of gadgets is QS = 0.25p where p is a unit price of gadgets and Q is the quantity in millions. Assume the domestic market demand for copper is relatively elastic and the domestic market supply of copper is relatively inelastic.

(a) Illustrate the autarky situation in these two markets. (Draw two diagrams separately.)

(b) At the world price of gadgets which is $50, the country engages in free trade. Including welfare analysis and calculate the gains from trade in the markets for gadgets. Illustrate it on your diagram. If the country has a balanced trade, can you tell how much is the value of exports?

(c) To protect domestic producers of gadgets, the government of Econtopia is considering either imposing an import tariff of $10 or setting a quota that would bring the domestic production equivalent to the level with a tariff. Do welfare analysis, qualitatively and quantitatively, for both policy instruments and compare the outcomes.

Answer rating: 100% (QA)

a To illustrate the autarky situation in the markets for gadgets and copper we will draw two separate diagrams For the market for gadgets The domestic demand for gadgets is represented by the equation ... View the full answer