Determine the effects of the specific export subsidy

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Reference no: EM133492682

Question:

Assume that the world consists of only two countries: A and B. Country A's demand for rice and country A's supply of rice have the following functions:

DA= 100-20P

SA= -20+20P

Country B's demand for rice and country B's supply of rice have the following functions:

DB=80-20P

SB=40+20P

where D, S, and P denote demand, supply, and the price in US$, respectively.

Please answer the following questions:

Part (a)

Given the information above, assume now that the government of the rice exporting country decides to apply a specific export subsidy of US$ 1 on its rice export.

Please graphically show that the effects of the specific export subsidy on the patterns of trade between the two countries in presence of the specific export subsidy.

Part (b)

Determine the effects of the specific export subsidy on the welfare of the rice exporting country. In other words, please compute the three components of the exporting country's welfare in the absence and in the presence of an export subsidy.

Reference no: EM133492682

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