Economics Worksheet With Answers - 2011

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Name: __________________________
Date: _____________
Problem Set #5 (Due in Class on June 2, 2011)
1. The table below represents a demand and supply schedule for a small-country
producer of iron ore. It sells output in its home market and on the world market at
the world price of $70 per ton.
Table: Demand and Supply for Iron Ore
Price/Ton
Quantity Demanded
Quantity Supplied
(Tons)
(Tons)
$100
10
100
$90
20
90
$80
30
80
$70
40
70
$60
50
60
$50
60
50
$40
70
40
$30
80
30
$20
90
20
$10
100
10
a.
At the world price of $70 per ton, how many units will be sold domestically?
.
The table shows 40 tons.
b. At the world price of $70 per ton, how many units will it export?
Supply is 70 tons and home demand is 40 tons, so 30 tons are left over for
export.
c. Suppose that the country's government offers its iron ore producers an export
subsidy of $10 per ton. How many tons will the country now export?
With a $10 per ton export subsidy, the producer is receiving a price of $80
per ton, assuming the producer exports all production. Then, the producer
will charge $80 per ton for home demand. At $80 per ton, the producer
produces 80 tons. The subsidy is an export subsidy, so the producer charges
$80 per ton at home. This leads to home demand of 30 tons. Then, 80 tons
produced minus 30 tons demanded leaves 50 tons exported.
d. How many tons will be sold domestically when exporters receive a $10-per-ton
export subsidy?
From part (c), 30 tons sold domestically.
e. What price will domestic iron ore consumers pay for their iron ore purchases when
there is a $10-per-ton export subsidy?
From part (c), $80 per tons domestically.
f. What is the total value of the export subsidy that exporters receive?
The producer makes an extra $10 per ton for each ton exported, so for the 50
tons exported, the exporter makes $500.
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