E1)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+5Qsandp=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 (i.e. price is 495/ton)?

(More than one answer can be correct)

a)European producers will produce more tomatoes

b)European producers will produce fewer tomatoes

c)European production remains unchanged

d)European producers stop selling tomatoes to European consumers

e)European producers stop exporting tomatoes

E2)What happens to European consumption once the subsidy is in place? (More than one answer can be correct)

a)European consumers no longer buy any tomatoes

b)European consumers buy more tomatoes

c)European consumers buy the same amount of tomatoes

d)European consumers exclusively consume European tomatoes

e)European consumers exclusively consume imported tomatoes

E3)What is the effect on daily EU consumer surplus?

(Use a positive number for an increase and a negative number for a decrease.)

E4)What is the effect on daily EU producer surplus?

(Use a positive number for an increase and a negative number for a decrease.)

E5)How much does this subsidy program cost the EU daily?

(Use a positive number for the cost.)

E6)What is the daily change in social welfare and why?

(Hint: Welfare is the difference between the cost of the subsidy program and the increase in producer and consumer surplus. Use a positive number for an increase and a negative number for a decrease.)