Answer: consumption.

## Explanation An export subsidy is a government payment to domestic producers for each unit of a good exported. In a small country context (where the country is a price-taker in world markets), the analysis is as follows: 1. **Without subsidy**: Domestic price equals world price (Pw). At this price: - Domestic production = Q1 - Domestic consumption = C1 - Exports = Q1 - C1 2. **With export subsidy**: The subsidy effectively increases the price received by domestic producers for exported goods. Producers now receive Pw + subsidy for exports. 3. **Impact on domestic market**: - Producers will want to sell more at the higher effective price - To export more, they need to divert supply from domestic to foreign markets - This creates upward pressure on the **domestic price** (it rises toward Pw + subsidy) - As domestic price rises: - **Domestic production increases** (producers are incentivized to produce more) - **Domestic consumption decreases** (consumers face higher prices) - **Exports increase** (difference between higher production and lower consumption) 4. **Key effects**: - **Domestic price increases** (not decreases) - **Domestic production increases** (not decreases) - **Domestic consumption decreases** (correct answer) Therefore, an export subsidy in a small country leads to: - Higher domestic prices - Increased domestic production - **Decreased domestic consumption** - Increased exports The correct answer is C because consumers face higher prices due to the subsidy, leading them to consume less of the good domestically.

Author: LeetQuiz .