Consider a world made of two countries, Home and Foreign, both of which are big enough

 Consider a world made of two countries, Home and Foreign, both of which are big enough for their decisions to affect world prices in the apple market. The demand for apples at Home is given by D= 80 – 20p and the supply of apples is given by S=40 + 20p. The demand and supply of apples at Foreign are, respectively D*= 100 – 20P* and S* = 20 + 20P* . 

a)Compute algebraically the equilibrium price of apples, the quantity demanded and supplied in each country and the quantities imported and exported in each country if each country has imposed a specific tariff of .5 on the other country’s apples. Show it in a graph.  Explain.

b)As part of a trade agreement, both countries decide to eliminate any trade restrictions on each other’s market for apples.  Compute algebraically the equilibrium price of apples, the quantity demanded and supplied in each country and the quantities imported and exported in each country under the free trade equilibrium.  Show it in the graph in a). Explain.

c)Indicate the welfare effects on the consumers, producers, and government of each country of the movement towards free trade.  Is Home better off under free trade? How about Foreign?  Show it in the graph in a). Explain.

d)Indicate the welfare effect in the world as a whole of the movement towards free trade. Is the world better off under the tariff or under free trade? Show it in the graph in a). Explain.