PROBLEM #7 [6 points]: Suppose that the world market for oil is very large. Further suppose that Canada is a small producer in the world market for oil and that

PROBLEM #7 [6 points]: Suppose that the world market for oil is very large. Further suppose that
Canada is a small producer in the world market for oil and that the world market is perfectly competitive.
Notice that SP and DD are the Canadian domestic supply and domestic demand, respectively.
Let PW be the world market’s equilibrium price for oil. Suppose that Canadian producers can produce up
to X: units at or below the world price, PW, and that beyond X1 units the Canadian producers can only
supply oil at a price that is higher than PW. Also, assume that at PW the demand for oil in the Canadian
market is X2, where X2 > X1.
For the purposes of your analysis, assume the original conditions in Canada are that there exists a ban
on imports of good X and then the ban is lifted in favour of free trade.
P
C
G
H
Pw
D
DO
Q1
Q3
Oil
a) Given the diagram above, complete the welfare analysis by filling out the table below.
[3 points]
+
Complete Trade Ban
Free Trade
Welfare Change
Consumer Surplus
Producer Surplus
Total Welfare
b) Discuss the effects on Canadian oil producers when the world price of oil increases, ceteris paribus.
[2 points]
c) Discuss the effects on Canadian oil consumers when the world price of oil increases, ceteris paribus.
[1 point] clarify how you were able to complete the chart, which reference point did you use etc

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