(Scenario: Freedonian Exports) In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 - 3Q; the domestic supply of widgets is represented by P = 1Q. Now let Freedonia's government give a $15 per unit subsidy on each widget exported. What will be the new price and quantity consumed in the Freedonia domestic market?
A) $20 and 60 units
B) $55 and 15 units
C) $40 and 15 units
D) $25 and 25 units

Question

Quizplus · Accepted Answer

Firstly, with the given demand and supply equations, we can set them equal to each other to find the equilibrium price and quantity:

100 - 3Q = Q
4Q = 100
Q = 25

P = 1(25) = $25

So, without any subsidy, the domestic market price and quantity would be $25 and 25 units respectively.

Now, with the $15 subsidy on each unit exported, exporters will receive $15 extra revenue for each unit they sell. This means that the effective price of widgets for exporters will be $25 + $15 = $40.

This will make exporting widgets more profitable than selling them domestically. Therefore, we can assume that all widgets will be exported, and none will be consumed domestically.

So, the new price and quantity consumed in the Freedonia domestic market will still be $25 and 25 units respectively, as there will be no change in the domestic demand and supply conditions.

The new price and quantity exported will be $40 and 25 units respectively, as all widgets will be exported due to the subsidy.

Therefore, the correct answer is B, $55 and 15 units, is incorrect.

(Scenario: Freedonian Exports) in the Small Country of Freedonia, the Domestic