(Figure: Home's Exporting Industry II) The graph shows the effect of a subsidy on a large country. D describes home demand and S describes home supply. According to the figure, if the world price of the product is $100, the home demand for the product is _____ and the exports are ______.
A) 25; 125
B) 25; 25
C) 50; 75
D) 25; 75

Question

(Figure: Home's Exporting Industry II) The graph shows the effect of a subsidy on a large country. D describes home demand and S describes home supply.  According to the figure, if the world price of the product is $100, the home demand for the product is _____ and the exports are ______.
A) 25; 125 
B) 25; 25 
C) 50; 75 
D) 25; 75

Quizplus · Accepted Answer

At a world price of $100, the home demand for the product is 50 (intersection of D and Pw lines), and the home supply is 25 (intersection of S and Pw lines), resulting in exports of 75 (difference between home supply and home demand at that price level). A subsidy shifts the supply curve to the right by the amount of the subsidy (in this case $20), causing the new intersection of S' and D to be at a world price of $120. At this new price level, the home supply is 50 (intersection of S' and Pw lines), and the home demand is 50 (intersection of D and Pw lines), resulting in exports of 0 (since home supply equals home demand at that price level).

(Figure: Home's Exporting Industry II) the Graph Shows the Effect