Suppose the world price of banana is P* and Ecuador decides to offer its banana exporters...

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Economics

Suppose the world price of banana is P* and Ecuador decides tooffer its banana exporters an export subsidy $s/unit. Use a graphof domestic demand- and supply-curves and:

(a) show the effect of the export subsidy on Ecuador's bananaprice, domestic supply, domestic demand, export quantity, consumersurplus, producer surplus, and government expenditure assumingEcuador is a small country;
(b) identify Ecuador's net welfare change as a result of the exportsubsidy assuming Ecuador is a small country;
(c) Assuming a production subsidy is used instead, show theeffect of the production subsidy on Ecuadorâ€™s banana price,domestic supply, domestic demand, export quantity, consumersurplus, producer surplus, government expenditure and total welfareassuming Ecuador is a small country.
(d) Between export subsidy and production subsidy, which wouldbe preferred by the consumers?
(e) Between export subsidy and production subsidy, which wouldbe preferred by the domestic producers?
(f) Between export subsidy and production subsidy, which wouldbe more desirable to the country?

Answer & Explanation Solved by verified expert

3.8 Ratings (730 Votes)

A Export Subsidy caseSo domestic price increases to PsubsidyDomestic supply falls as producers prefer exporting Q2 toQ4Domestic demand falls amid higher domestic prices Q1 to Q3Export Quantity increases Earlier exported Q2Q1 See Answer

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