Now, suppose that Island is a large exporting country with the following demand and supply functions and the free-trade world price is $5,000 per unit. D = 900,000 − 150P and S = 100,000 + 50P The Island government offers an export subsidy that increases the domestic market price to $5,500 and lowers the world price to $4,500. However, starting next month, the Island government will be removing the export subsidy in compliance with the latest international trade pact. A. What is the impact of the removal of the subsidy on domestic consumers? B. What is the change in producer surplus due to the movement to free trade? C. What is the net effect of moving to free trade on Island welfare?

Now, suppose that Island is a large exporting country with the following demand and supply functions and the free-trade world price is $5,000 per unit. D = 900,000 − 150P and S = 100,000 + 50P The Island government offers an export subsidy that increases the domestic market price to $5,500 and lowers the world price to $4,500. However, starting next month, the Island government will be removing the export subsidy in compliance with the latest international trade pact. A. What is the impact of the removal of the subsidy on domestic consumers? B. What is the change in producer surplus due to the movement to free trade? C. What is the net effect of moving to free trade on Island welfare?

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter18: International Trade And Finance

Section: Chapter Questions

Problem 7SQ

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Question

Now, suppose that Island is a large exporting country with the following demand and supply functions and the free-trade world price is $5,000 per unit.

D = 900,000 − 150P and S = 100,000 + 50P

The Island government offers an export subsidy that increases the domestic market price to $5,500 and lowers the world price to $4,500. However, starting next month, the Island government will be removing the export subsidy in compliance with the latest international trade pact.

A. What is the impact of the removal of the subsidy on domestic consumers?

B. What is the change in producer surplus due to the movement to free trade?

C. What is the net effect of moving to free trade on Island welfare?

Definition Definition Producer’s gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price and up to the equilibrium quantity.

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