The wool industry in Hypothetica is highly competitive with the many woolgrowers seeing themselves as being price takers in an industry with no significant barriers to entry. In order to improve the incomes of woolgrowers, the government of Hypothetica is contemplating subsidising wool production in order to reduce woolgrowers’ costs and thus increase their profits. The government is also considering, as an alternative policy, the provision of funds for the wool industry to improve the marketing of its product and thus to increase the demand for wool.
Using diagrams, show the impact of each of these two policies on a typical firm (i.e. woolgrower) in the wool industry in the long run. (Assume constant costs and also assume that all firms in the industry are initially in long run equilibrium). Will the typical woolgrower be better off in the long run if either policy is implemented?