Question

Assume now that NZ engages in free trade but that AUS sets an export subsidy equal...

Assume now that NZ engages in free trade but that AUS sets an export subsidy equal to s = $0.5 per unit

NZ: Demand: Qd = 100 - 20p Supply: Qs = -20 + 20p

AUS: Demand: Qd* = 70 - 20p* Supply: Qs* = -10 + 20p*

(a) Calculate the new world equilibrium price and the internal prices in the two countries.

(b) Calculate NZ demand and supply, AUS demand and supply, and NZ imports and AUS exports in the equilibrium with the subsidy. Illustrate.

(c) Illustrate the change in CS and PS and total welfare in NZ. Calculate the total welfare change.

(d) Illustrate the change in CS, PS, government revenue and total welfare in AUS. Calculate the total welfare change. Is subsidy a good idea for AUS in cost-benefit sense?

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