5. Refer to Problem 3. Suppose Home is a small exporter of wheat. At the world price of $100 per ton, Home growers export 20 tons. But rather than an export subsidy, suppose the Home government provides its domestic producer with a production subsidy of $40 per ton. Use the following figure to answer these questions.

a. What is the quantity exported with the production subsidy?

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

c. Calculate the overall net effect of the production subsidy on Home welfare. Is the cost of the production subsidy more or less than the cost of the export subsidy for the small country? Explain.

Transcribed Image Text:

Home price 140 100 10 20 40 D 50 Quantity