Part II: Consider two (large) economies, HC and FC, trading a single good. By assumption, the HC is the exporting nation, while the FC imports. The following equations describe demand and supply conditions in each country. HC demand: HC supply: FC demand: P=6-3Q P-2Q P*-12-20 FC supply: P*=3Q* 1. Derive the HC's export supply equation and FC's import demand equa- tion. 2. Determine the free trade price and the quantity exported/imported. 3. Calculate free trade welfare in both countries. 4. Now assume that the HC's government introduces an 0.8 (80cent) ex- port subsidy per unit exported. Find the domestic subsidy price, P the foreign subsidy price p', and the quantity exported/imported with the export subsidy. 5. Determine the cost of the subsidy, the domestic DWL, the foreign DWL, the terms-of-trade transfer, the domestic change in welfare and the foreign change in welfare. 6. Explain (i.e., decompose) the change in welfare in each country as a result of the home country's export subsidy.

Fig: 1