Question 1: FREE TRADE - Two Country Model .................. 20 points HOME + WORLD ES/ED ~ P . FOREIGN ~ D Q Q traded Q + (4 points) (a) Show and explain how derive the free trade world price. Then show how output and consumption in each country changes as we move to free trade.~ WORLD PRICE: ~ HOME (Q , Q"): ~ FOREIGN (Q , Q"): (4 points) (b) Show and explain how social surplus in each country changes as we move to free trade. Give the details and the intuition. ~ HOME: + FOREIGN + Now suppose the SUPPLY curve in FOREIGN rises (eg moves down/ to the right) ~(2 points) (c) Show how, and explain why, the free trade world price changes because of the rise in FOREIGN supply. ~ (2 points) (d) What do we mean by the Terms of Trade (To7) and why does an improvement (rise) in the ToT imply a rise in social surplus? ~ (4 points) e) Show how social surplus in HOME changes with this 'foreign supply shock". Explain the details fully. Relate to changes in the Terms of Trade. + (4 points) f) Show how social surplus in FOREIGN changes with this 'foreign supply shock'. + Explain the details fully. Relate to changes in the Terms of Trade