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.

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