Suppose the supply and demand for Continentia, a large country, is as follows:

Assume that the free-trade world price is $5,000 per unit. Further assume that the Continentia government offers an export subsidy that increases the domestic market price to $5,500 and lowers the world price to $4,500. However, starting next month, the Continentia government will be removing the export subsidy in compliance with the latest international trade pact.

a. What is the impact of the removal of the subsidy on domestic consumers?

b. What is the change in producer surplus due to the movement to free trade?

c. What is the net effect of moving to free trade on Continentia welfare?

d. Would Continentia consumers support or oppose the policy for free trade? What about producers? Explain.

Transcribed Image Text:

D=900,000-150P S=100,000+50P