Consider the perfectly competitive 'luxury goods' market in the UK where domestic demand is D, [P]=80-P, and the domestic supply is S, [P]=-16+2P, where P is the domestic price. In Russia (the rest of the world since there are only two countries), demand for UK exports of 'luxury goods' is D [P]=144-2P, where Pw is the world (Russian) price. Showing your workings at every stage: (a) Derive the equilibrium world price and domestic price under free trade. Calculate domestic consumption, domestic production, and exports under free trade in the UK. [20 marks]
