Question

Consider a small country that exports steel. Suppose the following graph depicts the domestic demand and supply for steel in this country. One of the two price lines represents the world price of steel. Use the following graph to help you answer the questions below. You will not be graded on any changes made to this graph. Demand Supply Triangle Polygon Price of Steel (Dollars per ton) 600 500 700 000 000 1993 100 200

Answer 1

a. Producer of every country export the goods when there is higher price of the good in the international market. The pro-trade government policy will give incentive to producers to export more at the world price. The domestic consumers have to purchase the steel at the world price because the producers are not interested in selling the steel in the domestic market as they are getting $10 in subsidy by selling at $70.

So, the price paid by domestic consumer is $70 and the price received by producer is $(70+10)=$80

b. The export subsidy has not changed the price of steel in the domestic market. So, the consumer demand for steel will remain unchanged , the quantity of steel produced by domestic producer increases and the quantity of steel exported also increases.

c. The statement is TRUE

This statement is true because an export subsidy will induce domestic producers to sell the steel at a higher price in the international market. They will be less willing to sell in the domestic market as they are getting lower price for the steel.

d. Government Revenue:

Revenue of government will be = -(80-70) * (800-0) = -8,000.

So, the revenue of government is negative, that is, -8000.

Thus, the government revenue decreases by 8000 and as a result, total surplus decreases.