1. (30 points) Country H, which is small, exports good X. Its excess supply curv

Question

1. (30 points) Country H, which is small, exports good X. Its excess supply curve is given by P=100+4X. The world price ratio Px/Py is P=200. It is suggested, but not required, that you use a graph to help answer the questions below. (Note that answers may be fractions of a unit.) a. Find the free trade equilibrium quantity of exports. b. What is the producer surplus in this equilibrium? c. Country H elects to offer a 25% subsidy to exports of X. What is the equilibrium quantity of exports with this subsidy? d. What is the producer surplus after the subsidy? e. What is the government expenditure on the subsidy? f. What is H’s deadweight loss due to the subsidy?

Explanation / Answer

A) World equilibrium price is P = 200. Plug-in this value in the export supply curve to get the quantity of exports:

P = 100 + 4X

200 = 100 + 4X

4X = 100

X= 25

Hence, the free trade equilibrium quantity of exports is 25 units

B) Producer surplus is the area between the price line and the export supply curve

Minimum price for export supply curve (required for calculating the vertical distance) is 100. Therefore, producer surplus is 1/2*(200-100)*25 = $1,125.

C) After the imposition of subsidy at 25% of 200 or $50, the export supply curve expands as the new price line is $250 after subsidy.

Plug-in this value in the export supply curve to get the quantity of exports:

P = 100 + 4X

250 = 100 + 4X

4X = 150

X= 37.5

Hence, the equilibrium quantity of exports after subsidy is 37.5 units

D) Minimum price for export supply curve (required for calculating the vertical distance) is 100. Therefore, producer surplus is 1/2*(250-100)*37.5 = $2,812.50

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