Question

Consider the domestic policy action listed along the top row of the table below. In the empty boxes, use the following notation to indicate the effect of the policy on the variables listed in the first column. Use a partial equilibrium model to determine the answers and assume that the shapes of the supply and demand curves are "normal.” Assume that the policy does not begin with, or result in, prohibitive policies. Also assume that the policy does not correct for market imperfections or distortions. Use the following notation: + the variable increases - the variable decreases O the variable does not change A the variable change is ambiguous (i.e., it may rise, it may fall) For example, a production subsidy applied by a small country to an import-competing industry will have no effect on the domestic market price of the import good; therefore a 0 is placed in the first box of the table. Production Subsidy to an Import Industry by a Small Country Domestic Market Price Domestic Industry Employment Domestic Consumer Welfare Domestic Producer Welfare Domestic Government Revenue Domestic National Welfare Foreign Price Foreign Consumer Welfare Foreign Producer Welfare Foreign National Welfare

Answer 1

Solution:

	Production Subsidy to an Import Industry by a Small Country
Domesti Market Price	-
Domestic Industry Employment	+
Domestic Consumer Welfare	+
Domestic Producer Welfare	A
Domestic Government Revenue	0
Domestic National Welfare	-
Foreign Price	0
Foreign Consumer Welfare	+
Foreign Producer Welfare	-
Foreign National Welfare	-

The production sponsorship adequately brings lowers the expense of production in domestic nation, so domestic firms increment production which brings down residential cost. Purchaser government assistance ascends from fall in cost however maker government assistance may rise, fall or remain unaltered, contingent upon whether ascend in amount more than makes up at the fall in cost. Lower domestic cost will bring lower import demand leading a fall inforeign cost of the imported good.