What happens to the large country's domestic price of widgets when a large country gives a subsidy of X dollars for each unit exported?
A) The domestic price will rise by X dollars.
B) The domestic price will rise by more than X dollars
C) The domestic price will rise by less than X dollars.
D) The domestic price will not change.

Question

Quizplus · Accepted Answer

The subsidy incentivizes producers to export more widgets, increasing the supply of widgets on the international market. With more supply, the price of widgets on the international market will decrease, making it more difficult for domestic producers to charge a higher price. As a result, the domestic price of widgets will likely rise, but by less than the amount of the subsidy.

What Happens to the Large Country's Domestic Price of Widgets