4. Refer to Problem 3. Rather than a small exporter of wheat, suppose that Home is a large country. Continue to assume that the free-trade world price is $100 per ton and that the Home government provides the domestic producer with an export subsidy in the amount of $40 per ton. Because of the export subsidy, the local price increases to $120, while the foreign market price declines to $80 per ton. Use the following figure to answer these questions.

a. Relative to the small-country case, why does the new domestic price increase by less than the amount of the subsidy?

b. Calculate the effect of the export subsidy on consumer surplus, producer surplus, and government revenue.

c. Calculate the overall net effect of the export subsidy on Home welfare. Is the large country better or worse off as compared to the small country with the export subsidy?
Explain.

Transcribed Image Text:

Home price 120 100 80 15 20 40 45 D Quantity