(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 graph, what is the home deadweight loss due to the $100 export subsidy?
A) $12,500
B) $625
C) $1,250
D) $5,000

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 graph, what is the home deadweight loss due to the $100 export subsidy?
A) $12,500 
B) $625 
C) $1,250 
D) $5,000

Quizplus · Accepted Answer

The home deadweight loss due to the $100 export subsidy is the triangle formed by the points where the S curve intersects with the world price line and the home demand curve. The base of the triangle is the difference between the quantity supplied without the subsidy and the quantity supplied with the subsidy, which is 100 units. The height of the triangle is the difference between the world price and the pre-subsidy price, which is $12.50. The formula for calculating the area of the triangle is 1/2(base x height), which gives a deadweight loss of $1,250.

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