Consider the following two-country model of the market for spinach. All producers and consumers take the price of spinach as given.

Home's supply curve for spinach is given by SH=5+P, where SH is the quantity supplied by Home producers in millions of tons and P is the price in dollars per ton.

Home's demand curve is given by DH=100-P, where DH is the quantity demanded in Home. Foreign's supply and demand curves are given by SF=2P and DF=100-P, respectively. Suppose that Home does not impose any trade policy, but Foreign provides a $5 per ton export subsidy.

Draw three diagrams: for world market, for Home domestic market and for Foreign domestic market.

On the first diagram, show how the Foreign export supply curve is shifted and how the world price and the trade quantity are affected. Calculate the world price and traded quantity with an export subsidy.

On the second diagram, show the welfare effects for Home.

On the third diagram, show the welfare effects for Foreign. Make sure to indicate the terms-of- trade effect and the DWL in the Foreign welfare diagram.

For which country is this a benefit? For which country is it a loss?