Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, then its domestic price of sugar will:
A) fall by $50 per ton.
B) rise by $50 per ton.
C) remain unchanged at $100 per ton.
D) first fall to $50 per ton, then rise to $100 per ton.

Question

Quizplus · Accepted Answer

Since the world price of sugar is $100 per ton, the domestic price in the absence of the subsidy would also be $100 per ton. However, with the subsidy of $50 per ton given to exporters, they will be able to sell sugar at $100 per ton (the world price) and still make a profit of $50 per ton. This will result in an increase in supply of sugar in the domestic market, causing the domestic price of sugar to rise by $50 per ton to $150 per ton (price of sugar with subsidy minus subsidy amount).

Suppose That the World Price of Sugar Is $100 Per