370_Homework_6_AK - Econ 370 Spring 2011 International...

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Econ 370 Spring 2011 International Trade Professor Soderbery Homework 6 ANSWER KEY Export and Production subsides under Perfect and Imperfect Competition 1. Suppose Home is a small exporter of wheat. 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. a. What is the quantity exported under free trade and with the export subsidy? Answer: Under the export subsidy, exports increase to 40 tons, whereas the amount exported under free trade is 20 tons. b. Calculate the effect of the export subsidy on consumer surplus, producer surplus, and government revenue. Answer: Refer to the following figure:
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Econ 370 Spring 2011 International Trade Professor Soderbery Consumer surplus decreases by the area a + b ±² ³ ´µ¶ · ¸¶ ´ ¸ ¹ (µ¶ · ¸¶) ³ ´º¶¶ Producer surplus increases by a + b +c »² ³ (µ¶ · µ¶) ¼ ¸ ¹(µ¶ · ¸¶) ³ ¸½¾¶¶¶ Government revenue decreases by b + c + d ¿ÀÁÂÃÄÁ ³ ´µ¶ · µ¶ ³ ´¸º¾¶¶¶ 2. Consider a large country with export subsidies in place for agriculture. Suppose the country changes its policy and decides to cut its subsidies in half. a. Are there gains or losses to the large country, or is it ambiguous? What is the impact on domestic prices for agriculture and on the world price? Answer: There are unambiguous gains to the large exporting country. Not only do deadweight losses decrease but terms-of-trade losses due to the subsidy are also diminished.
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Econ 370 Spring 2011 International Trade Professor Soderbery b. Suppose a small food-importing country abroad responds to the lowered subsidies by lowering its tariffs on agriculture by the same amount. Are there gains or losses to the small country, or is it ambiguous? Explain. Answer:
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This note was uploaded on 02/06/2012 for the course ECON 370 taught by Professor Staff during the Fall '08 term at Purdue University-West Lafayette.

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370_Homework_6_AK - Econ 370 Spring 2011 International...

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