Assume that the world consists of only two countries: A and B. Country A’s demand curve for rice and country A’s supply of rice are DA= 100-20P SA= -20+20P Country B’s demand curve for rice and country B’s supply of rice are: DB=80-20P SB=40+20P where D, S, and P denote demand, supply, and the price in US$, respectively. Please answer the following questions:
Part (a) If the two countries can freely trade with each other, please graphically show the trade patterns between them? Specifically, which country will be the exporter of rice? What is the price of rice in free trade? What is the volume of their bilateral trade?
Part (b) Given the information in Question 1.1. assume now that the government of the rice exporting country decides to apply a specific export subsidy of US$ 0.5 on its rice export. Please graphically show that the effects of the specific export subsidy on the patterns of trade between the two countries.
Part (c) Determine the effects of the specific export subsidy on the welfare of the rice exporting country. In other words, please compute the three components of the exporting country’s welfare in the absence and in the presence of an export subsidy.