We have the following demand and supply curves for clothing for the home and foreign economies....
We have the following demand and supply curves for clothing for the home and foreign economies.
| Home | Foreign | |
| Supply | QC = -20 + 10P | QC* = -20 + 20P* |
| Demand | DC = 100 - 10 P | DC* = 100 - 20P* |
a. Compute the autarky price and quantities for both countries.
b. Compute the world price and quantity traded under free trade. Also compute the quantities supplied and demanded for the home and foreign country individually.
c. Draw two graphs, one for each country, which show both the autarky and free trade equilibrium. Fully label the diagrams including exports, imports and the numerical values for each. Identify on the diagrams the areas corresponding to the change in consumer surplus and producer surplus which result from the move to free trade. Also, calculate the exact change in welfare for each country.
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