Suppose that the world price of sugar is $100 per ton. If a large 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) rise by less than $50 per ton.

Question

Quizplus · Accepted Answer

The subsidy allows the exporters to sell their sugar at a lower price than the world price, which will increase the supply of sugar in the domestic market. This increase in supply will lead to a decrease in the domestic price of sugar. However, the domestic price will not decrease by the full amount of the subsidy (i.e. $50 per ton) because the subsidy only applies to the exporters and not all sugar producers. Therefore, the domestic price will rise by less than $50 per ton, but it will still be higher than the world price.

Suppose That the World Price of Sugar Is $100 Per