(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 results in a(n) ________ in producer surplus by the amount of ______.
A) reduction; $6,500
B) reduction; $5,000
C) increase; $5,500
D) increase; $4,000

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 results in a(n) ________ in producer surplus by the amount of ______.
A) reduction; $6,500 
B) reduction; $5,000 
C) increase; $5,500 
D) increase; $4,000

Quizplus · Accepted Answer

When the export subsidy of $50 is introduced, it decreases the cost of production for the exporter, resulting in an increase in the quantity supplied from Q1 to Q2. However, the home demand remains the same. Therefore, the exporter sells the excess supply at a lower price in the international market, resulting in an increase in consumer surplus by the amount of $5,500. At the same time, the producer surplus increases as the exporter receives the original price plus the subsidy per unit, resulting in a total increase of $5,000 in producer surplus. Therefore, the correct answer is C, an increase in producer surplus by the amount of $5,000.

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