Consider a closed, small economy where the domestic demand for x (assumed to be downward sloping) and the domestic supply of x (assumed to be upward sloping) determine the equilibrium price and quantity: p, and x. Provide your analysis with help of diagrams.- (1) Identify the consumer's surplus (CS) and the producer's surplus (PS) in a diagram. Assume that the international price for good x is P, assumed to be lower than p. (ii) As the country is open up for trade, good x can be imported from the international markets. Thus, the international price p, becomes the new price consumers pay and producers receive. What would the effects of free trade on CS, PS and the welfare (W=CS+PS) be? Analyze with help of a diagram. (iii) For (ii), let the amount of import to be M. If the government decides to restrict the amount of import to M, where Mâ‚‚< M, what will the effect of such a restriction on import be on social welfare relative to your answer in (ii)?
