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In: Economics

Consider a small country that exports good Z. Some of the total quantity of Zthat is...

  1. Consider a small country that exports good Z. Some of the total quantity of Zthat is domestically produced is consumed by domestic consumers and the rest of it is exported. Then suppose that the government places a subsidy s on each unit of Z exported. While, obviously, this subsidy increases the quantity of Zexported, some of the production of Z continues to be purchased by domestic consumers. Show the effects of this export subsidy using a carefully labeled demand and supply diagram.

  2. Identify using capital letter(s) the area on your diagram that represents the change in consumer surplus. Provide an explanation for your answer.

  3. Identify using capital letter(s) the area on your diagram that represents the change in producer surplus. Provide an explanation for your answer.

  4. Identify using capital letter(s) the area on your diagram that represents the government expenditure associated with the subsidy. Provide an explanation for your answer.

  5. Identify using capital letters the areas on your diagram that represents the dead-weight loss associated with the subsidy. Provide an explanation for your answer.

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