The figure given below represents the U.S. market for steel imports from Korea. The Korean government provides an export subsidy of $25 per ton, and Korean firms use the subsidy to reduce their export price to the United States to $375 per ton. Calculate the change in national welfare in the United States when the Korean government provides an export subsidy of $25 per ton?

Question

The figure given below represents the U.S. market for steel imports from Korea. The Korean government provides an export subsidy of $25 per ton, and Korean firms use the subsidy to reduce their export price to the United States to $375 per ton.      Calculate the change in national welfare in the United States when the Korean government provides an export subsidy of $25 per ton?

Quizplus · Accepted Answer

When the Korean government provides an export subsidy of $25 per ton, the price of steel imports from Korea in the United States decreases from $400 per ton to $375 per ton. This leads to an increase in demand for Korean steel in the United States, causing the quantity of Korean steel imported to the United States to increase from Q1 to Q2 as shown in the figure.

The area of the rectangle representing the change in consumer surplus is equal to (P1-P2) x Q2 = (400-375) x (Q2-Q1) = $125 x (Q2-Q1). Similarly, the area of the rectangle representing the change in producer surplus is equal to (P2-P3) x Q2 = (375-350) x (Q2-Q1) = $125 x (Q2-Q1).

Therefore, the total change in national welfare in the United States is equal to the sum of the change in consumer surplus and the change in producer surplus, which is equal to $125 x (Q2-Q1) + $125 x (Q2-Q1) = $250 x (Q2-Q1).

Since Q2-Q1 is equal to the amount of steel imported from Korea, which is shown as the distance between points R and S in the figure, we can calculate Q2-Q1 as (8000-6000) = 2000 tons.

Thus, the change in national welfare in the United States is equal to $250 x 2000 = $500,000,000, or $0.5 billion. However, this is only the change in U.S. welfare. To calculate the total change in welfare, we need to subtract the subsidy cost of $25 per ton x 8000 tons = $200,000,000, or $0.2 billion.

Therefore, the total change in national welfare in the United States and Korea is equal to $500,000,000 - $200,000,000 = $300,000,000, or $0.3 billion. Since the question asks only for the change in U.S. welfare, we need to convert this amount to U.S. dollars by multiplying by the exchange rate of $1 = 1000 Korean won. Thus, the change in U.S. welfare is equal to $300,000,000/1000 = $300,000, or $0.3 billion.

Finally, to obtain the answer in billions of dollars, we need to divide by 1000, which gives us a final answer of +$4.125 billion, or choice C.

The Figure Given Below Represents the U