Given that the world supply curve is horizontal at the world price for a given g

Question

Given that the world supply curve is horizontal at the world price for a given good, can a subsidy on imports raise welfare in the importing country? 12 1.) Use the line drawing tool to show the effect of a $1 per unit subsidy by shifting world supply. Label this line 'S1. 9 2.) Use the point drawing tool to indicate the quantity demanded and price with the subsidy. Label this point a EA 7 world Carefully follow the instructions above, and only draw the required objects 4 4 2 What is the cost of the subsidy, the change in consumer surplus, and the change in welfare? (round all answers to two decimal places) 0 1 2 3 4 5 6 78 9 10 11 The subsidy costs taxpayers $5 The change in consumer surplus is $ 4.5 The change in welfare is $-0.5 Quantity, Q

Explanation / Answer

1. cost of subsidy = cost of per unit subsidy * quantity

= 1 * 5 = 5 dollars.

2. CS before the subsidy = 1/2 * 4 * 4 = 8 units

CS after subsidy = 1/2 * 5 *5 = 12.5

Change is CS= 12/5-8 = 4.5 units

3. Total surplus without Subsidy = CS+ PS + GOV = 8+0+0= 8

TS with subsidy = CS+PS+GOV= 12.5 +0 -5 = 7.5

change in welfare = 7.5-8 = -0.5 units

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