What happens to the large country's domestic price of
Widgets when a large country gives a subsidy of X dollars
For each unit exported?
A)The domestic price will rise by X dollars.
B)The domestic price will rise by more than X dollars
C)The domestic price will rise by less than X dollars.
D)The domestic price will not change.

Question

Quizplus · Accepted Answer

When a large country gives a subsidy of X dollars for each unit exported, the domestic producers are encouraged to export more. As a result, the domestic supply for the Widget will decrease, and the price of the Widget in the domestic market will increase as the demand remains constant. However, the increase in price will be less than the subsidy amount X, as the producers will absorb a part of the subsidy to remain competitive in the international market. Hence, the best choice is C, as the domestic price will rise by less than X dollars.

What Happens to the Large Country's Domestic Price of