Suppose the government grants a subsidy to its export firms that permits them to charge lower prices on goods sold abroad.The export revenue of these firms would rise if the foreign demand is

Question

Quizplus · Accepted Answer

If foreign demand is elastic in response to the price reduction, then the lower prices will lead to a greater increase in the quantity demanded, which will generate more export revenue for the firms that receive the subsidy. In contrast, if foreign demand is inelastic or unit elastic, then the lower prices will lead to a smaller increase or no change in the quantity demanded, respectively, which will limit the increase in export revenue for the firms. Therefore, the best choice is A.

Suppose the Government Grants a Subsidy to Its Export Firms