1. Suppose there is a small, closed economy that produces bananas. The domestic demand and domestic supply curves for bananas in this small, closed economy are given as:
Domestic demand: P = 20 - (1/2)Q
Domestic supply: P = 2 + (1/10)Q
a. What is the equilibrium price and quantity of bananas in this small, closed economy?
b. Suppose that the world price of bananas is $8 per unit of bananas and this economy opens to trade. Provide a numerical measure of this country's imports or exports of bananas once the market is open to trade.
c. If this closed economy opens its banana market to trade with the world price of bananas equal to $8 per unit of bananas, what will be the change in consumer surplus due to this decision?
d. Suppose that the world price of bananas is $2.50 per unit of bananas. If this market opens to trade, what will be the level of imports or exports of bananas?
e. Given the scenario in part (d), what will be the change in consumer surplus when this economy goes from being a closed economy with regard to the banana market to being an open economy with regard to the banana market?
f. Suppose that the world price of bananas is $2.50 per unit of bananas and that this economy is open to trade. Suppose the government implements a tariff of $1.00 per unit of bananas. Calculate the tariff revenue from the implementation of this policy and the deadweight loss from the tariff.
g. Suppose the government wishes to replace the tariff described in part (h) with a quota that results in the same consumer surplus as the consumer surplus with the tariff, the same producer surplus as the producer surplus with the tariff, and the same deadweight loss as the deadweight loss with the tariff. How many units of bananas should the quota equal for this result? Explain your answer.
h. Trade has distributional consequences. Briefly summarize who wins and who loses when an economy opens to trade. Be specific in your answer.