Ch 10 #2-7 - Jeff Phang 992268154 CH 10 #2-7 #2 Large...

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Jeff Phang 992268154 CH 10 #2-7 #2 Large country with export subsidies cut in half. a) With export subsidies in the large country cut in half, the large country gains relative to the initial DWL. The reduction in the subsidy would decrease the price that producers are willing to receive thereby increasing domestic demand and decreasing domestic supply. The price received by producers would decrease but the price paid by importers (Pw) would increase. The export supply curve would shift in. The home government would not loose as much through the reduction in the subsidy and there would be a terms of trade gain for the large country. b) The small country’s optimal tariff is 0. By decreasing the tariff in the small country, the small country gains back a DWL. However when the home country decreases its subsidy of its exports, the TOT for the small country falls. Whether the welfare of the small country increase or decreases depends on if the gain from reduction in tariff exceeds the decrease in the TOT from the decrease in subsidy of exports by the home country. The small country would loose from the elimination of the tariff. Because the large country lowered its subsidy, the small importers will have to pay an increased Pw. The increase in price would decrease imports and result in a loss for the small country. In
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Ch 10 #2-7 - Jeff Phang 992268154 CH 10 #2-7 #2 Large...

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