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?

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.

c. Suppose a large food-importing country abroad reciprocates by lowering its tariffs on agricultural goods by the same amount. Are there gains or losses to this large country, or is it ambiguous? Explain

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S Home price P + s P + ¹s pw pe D a. (a) Home Market D₂ D₁ S₁ S₂ Quantity World price (b) World Market b+d X₁ X3 X₂ Home export supply, X X-¹5 X-S Foreign import demand, M Exports