Assume that the EU subsidizes the exports of tomatoes to support employment in agriculture. Supply and demand of European producers and consumers are equal top=200+5qs andp=500qdrespectively (where prices are in and quantities in tons). Under free trade, the EU is a net exporter of tomatoes and exports 30 tons every day at 475 per ton. Assume that under free trade, the global price is 475 per ton. Now, to support employment in agriculture, the EU starts subsidizing every ton of exports by about 4.2% such that the price European producers get, after the subsidy, rises from 475/ton to 495/ton. Assume the EU is a price taker and cannot affect the world price.

What happens to European production once the subsidy is in place?

(Select each correct answer.)

European producers will produce more tomatoes

European producers will produce fewer tomatoes

European production remains unchanged

European producers stop selling tomatoes to European consumers

European producers stop exporting tomatoes

What happens to European consumption once the subsidy is in place?

(Select each correct answer.)

European consumers no longer buy any tomatoes

European consumers buy more tomatoes

European consumers buy the same amount of tomatoes

European consumers exclusively consume European tomatoes

European consumers exclusively consume imported tomatoes