1. Suppose Home is a small open economy, exporting wheat to the world market. At

Question

1. Suppose Home is a small open economy, exporting wheat to the world market. At the world price of $100 per ton, Home growers export 20 tons. Now suppose the Home government decides to support its domestic producer with an export subsidy of $40 per ton. Use the following figure to answer these questions Home price 140 a b 100 10 20 40 50 Quantity a) What is the quantity exported under free trade and with the export subsidy? b) Using the letters above, what is the effect of the export subsidy on consumer surplus producer surplus, and government revenue? What is the overall net effect of the export subsidy on Home welfare?

Explanation / Answer

Export = Supply - Demand = 40-20 = 20

Under export subsidy

Export = Supply – Demand = 50-10 = 40

2. Consumer Surplus = -(a+b)

Producer Surplus = + (a+b+c)

Government Revenue = -(b+c+d)

Welfare loss= - (b+d)

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