(Figure: Home's Exporting Industry I) The graph shows information about a small home exporter. D is home demand and S is home supply. According to the graph, an export subsidy of $50 per unit results in a(n) ________ of government revenue by the amount of ______.
A) increase; $5,000
B) increase; $2,500
C) decrease; $5,000
D) decrease; $21,000

Question

(Figure: Home's Exporting Industry I) The graph shows information about a small home exporter. D is home demand and S is home supply.  According to the graph, an export subsidy of $50 per unit results in a(n) ________ of government revenue by the amount of ______.
A) increase; $5,000 
B) increase; $2,500 
C) decrease; $5,000 
D) decrease; $21,000

Quizplus · Accepted Answer

An export subsidy shifts the supply curve to the right, increasing the quantity supplied and reducing the price received by home producers. As a result, home producers receive a lower price for the exported goods, and the quantity of exports increases. The loss in government revenue is equal to the subsidy amount times the quantity of exports. In this case, the quantity of exports increases from 20 to 80 as a result of the subsidy, so the loss of government revenue is ($50 subsidy per unit) x (60 unit increase) = $3,000. Since the exporter is a small one, the total value of exports is unlikely to be very large, so a $3,000 loss of government revenue is likely to be quite significant relative to the amount of exports. Therefore, the correct answer is (C) decrease; $5,000, since $3,000 is likely to be a significant share of the government's total revenue.

(Figure: Home's Exporting Industry I) the Graph Shows Information About