Suppose the domestic demand for turnips is P = 100

Question

Suppose the domestic demand for turnips is P = 100 - Q. The domestic supply of turnips is P = 10 + Q. The world price is $30 per unit. If the domestic suppliers get $10 per unit of subsidy, then the total import will be:

Quizplus · Accepted Answer

With a subsidy of $10 per unit, the domestic supply equation becomes P = 20 + Q (since suppliers would be willing to supply at a lower price due to the subsidy, effectively lowering the price at which they are willing to supply). At the world price of $30, set the demand and supply equal to each other to find the equilibrium quantity: 100 - Q = 30 + Q, solving this gives Q = 35. Without the subsidy, at the world price of $30, the domestic supply would be 10 + Q = 30, solving for Q gives 20. The difference between the quantities, 35 (with subsidy) and 20 (without subsidy), indicates the reduction in imports due to the subsidy, not the total import. To find the total import, we need to consider the demand at the world price without the subsidy effect. At a price of $30, the demand is 100 - 30 = 70. Since the domestic supply without subsidy at $30 is 20, the total import is 70 - 20 = 50. The correct calculation for total imports should consider the demand at the world price and the domestic supply without considering the subsidy effect directly on imports, leading to an error in the initial explanation.