A country is a leading producer of lumber. They want to increase their export of lumber. Theydecide to impose a subsidy on the export of lumber. What are the result of this decision onexports, domestic consumers, and producers?

Question

(1 point)
The subsidy will decrease exports of lumber, lower prices for domestic consumers, and raise the
price for producers.
The subsidy will decrease exports of lumber and raise the prices for domestic consumers and
producers.
The subsidy will increase exports of lumber and raise domestic prices for consumer and producers.
The subsidy will increase exports of lumber and lower prices for domestic consumers and producers.

Answer 1

The correct answer is:

The subsidy will increase exports of lumber and lower prices for domestic consumers and producers.

Here's the reasoning:

1. Increase in Exports: Subsidies on exports provide financial assistance to producers, making their goods cheaper in international markets. This encourages more foreign buyers to purchase lumber from this country, leading to an increase in exports.

2. Lower Prices for Domestic Consumers: The influx of export activity and the financial support to producers can lead to an increase in supply in the domestic market. Even though there is a subsidy, the overall effect of the increased supply can lead to lower prices for domestic consumers.

3. Impact on Producers: While the subsidy increases revenue for producers on exports, domestic prices may lower due to increased supply and competition domestically. This may not necessarily mean higher prices for domestic producers if the market becomes oversaturated.

Therefore, the result of this decision is that it increases exports while also lowering prices for both domestic consumers and producers.