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 the foreign demand is elastic, firms will sell more units of goods due to the price reduction, and the increase in export revenue will more than offset the cost of the subsidy. In contrast, if foreign demand is inelastic, firms will sell fewer units of goods due to the price reduction, and the increase in export revenue will be offset by the lower prices. Therefore, the subsidy will only be effective in increasing the export revenue of firms selling goods with elastic demand.

Suppose the Government Grants a Subsidy to Its Export Firms