Suppose that cookies are produced in the United States and sold both domestically and abroad. American consumers will buy only American cookies. Cookie production creates pleasant aromas, so that every time a box of cookies is produced in the U.S., those who live near the factores enjoy $2 worth of benefit. The benefit is the same regardless of whether the cookies are ultimately sold in the U.S. or abroad.

The price at which the cookie manufacturers' supply curve crosses Americans' demand curve is $5 per box. Manufacturers can sell as many cookies as they want to in the world market at a price of $10 per box.

1. Suppose the U.S. government offers American cookie makers a subsidy of $2 for each box of cookies they export. (There is no subsidy for cookies sold in the U.S.) Illustrate the gains and losses to all relevant groups of Americans. Does the subsidy increase or decrease social welfare? By how much?
2. Suppose the U.S. government offers American cookie makers a subsidy of $2 for each box of cookies they produce. Illustrate the gains and losses to all relevant groups of Americans. Does the subsidy increase or decrease social welfare? By how much?

7.Suppose the U.S. government offers American cookie buyers a subsidy of $2 for every box of cookies they buy. Illustrate the gains and losses to all relevant groups of Americans. Does the subsidy increase or decrease social welfare? By how much?

Hint: For each of the above three questions, make sure you clearly write how much consumers pay and how much they consume, and also the price domestic producers receive and how much they produce.