Assume that the market for cotton clothing is perfectly competitive. WeaveLand is a net exporter of cotton clothing.

Assume that the world price for cotton clothing decreases by $10 per unit, from WP1 to WP2, because producers in SpinLand have developed a more efficient way of producing cotton clothing. Suppose WeaveLand continues to be an exporter of cotton clothing after the change.

a) Use a graph and explain how this decrease in the world price will affect the equilibrium outcome in the market for cotton clothing in WeaveLand (indicate new price, new quantity supplied, new quantity demanded, new exports).

b) How will the well-being of WeaveLand consumers of cotton clothing and WeaveLand suppliers of cotton clothing be affected? What is the effect on total surplus in the market for cotton clothing in WeaveLand?

c) The government of WeaveLand announces that it will introduce an export subsidy per unit of cotton clothing exported by WeaveLand suppliers. The per-unit export subsidy amount will be $10 per unit of production that is exported to the international market.

Will the new subsidy (whose amount is equal to the decline in world price) offset the effect of the decrease in world price? Will well-being in WeaveLand be the same as before the world price decrease?

Explain by calculating the change in consumer surplus, producer surplus, and total surplus.

d) Would domestic consumers in WeaveLand pay the subsidy-inclusive price or internationally at the lower world price, WP2? Does the government subsidise the units of clothing sold to the domestic market?