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Question 2 Consider an economy that is closed and produces a good (Q 1 ). The...

Question 2

Consider an economy that is closed and produces a good (Q 1 ). The domestic supply and demand for the good is given below:

Supply: Q 1 = -50 + 5P Demand: Q 1 = 400 – 10P

a. Find the equilibrium price and quantity in the market and illustrate graphically.

b. Suppose the world price in the market is $15 per unit and the country opens up to trade.

Calculate the quantity of imports or exports in this market.

c. After the country opens up to trade, calculate consumer surplus and producer surplus.

Identify these areas on your graph.

d. After trade, what is the increase in the value of total surplus?

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