1. The Kingdom of Tradia is a small, open, export-oriented country. Suppose initially that the world price of "stuff" is $150. Due to successful lobbying activities, Tradia "stuff" producers will now receive a subsidy of $25 per unit exported. Use the following graph to answer the following questions.
a. Do you expect Tradia to export more with the subsidy? If so, by how much?
b. What is the change in consumer surplus due to the subsidy?
c. What is the change in producer surplus due to the subsidy?
d. How does the subsidy affect welfare in Tradia?
2. Now let's assume that the Peoples Republic of Exportia (PRE) is a small exporting country with demand for "stuff" and supply of "stuff" given by the following equations:
D = 100 - 5P and S = 10P - 50. Suppose the free trade world price is $12 per unit of "stuff".
a. In the absence to any barriers to trade, what are the domestic consumption and production of "stuff"?
How much is exported?
b. Suppose the PRE government offers Exportian "stuff" producers an export subsidy of $3 per unit. In addition, the government imposes a tariff of $3 per unit on imports of "stuff". Calculate the price paid and quantity demanded by Exportian consumers.
c. Calculate the net effect of the export subsidy on overall welfare in the PRE.