Q2 (25 points): Suppose the United States provides a production subsidy to its import-competing producers of solar panels (a product the United States imports).

(a) Use a domestic-market graph to show the effect of the production subsidy on domestic consumer surplus, domestic producer surplus, government expenditure, and total welfare;

(b) How would the effect on domestic consumer surplus change if the consumers have to pay taxes to finance the government expenditure?

(c) Between a tariff and a production subsidy, which policy leads to a greater deadweight loss? Illustrate your answer graphically and identify the extra deadweight loss.

Q3 (20 points):Suppose the world price of corn, P*, is higher than Mexico's autarky price, and Mexico currently offers its corn producers an export subsidy $s/unit. Use a domestic-market graph to:

(a)show the effect of removing the export subsidy on Mexico's domestic price, domestic supply, domestic demand, export quantity, consumer surplus, producer surplus, and government expenditure assuming that Mexico is a small country.

(b)Assuming that consumers are also taxpayers that used to pay for the government's subsidy expenditure in the above graph, identify the change in consumer surplus due to the removal of the export subsidy.

(d) Between a tariff and a production subsidy, which policy is more preferred by domestic consumers assuming that consumers have to pay taxes to finance the government expenditure?