Question

Suppose that the demand curve for wheat is

Qd= 400-10p

Qs= 10p

The government provides producers with a specific subsidy of S=​$11 per unit.

How do the equilibrium price and quantity change?

The equilibrium price by $_______ and the equilibrium quantity by $_______ units. (Enter numeric responses using real numbers rounded to two decimal places.)

What effect does this tax (subsidy) have on consumer surplus, producer surplus, government revenue, welfare, and deadweight loss?

Consumer surplus (increase or decrease) by $ ___

Producer surplus (increase or decrease) by  $ ___

Government revenue (increase or decrease) by $ ___

Therefore, deadweight loss from the subsidy is ____

Answer 1

Before subsidy : Demand: Qd = 400 - 10P » 10P = 400-Qd IP = 40 - 0.101 Supply: Qs = 10P P = 0.1Q + 0 At equilibrium, Qd = Qs : 400-10P = 10p > 20P = 400 P=20

At P = 20 Qd = G = 200 the .. The equilibrium price is $20 and equilibrium quantity is 200 units. price A 40 20 P.S - Quantity 200 ...s= x 200 × (40-20)= $2000 P.S = – 4 x 2008 (20-0) = $2000 when a subsily of $11 per unit is provided, that will shift the supply curve sight ward by the amount of subsidy. Let p= after subsidy equilibrium price. That is, consumers pay p dollars but sellers receive (P+) dollars. Demand equation pemains same: P4 Qd = 400-10P Supply eqation changes (replace p with (P+1D): - Qs = 10(p+11) + Qs = 10 p + 110 At after subsidy equilibrium, 400-lop=10P+11o 720P = 290 = P = 14.5

le consumers pay $19:5 /unit but sellers peceive (P+11)= $(14.5 +11) = $25.5 /unit Primit Ssubsidy 25.5 B . 207 14. 5 E 0 200 255 Quantity At P = $14.5 from any of aften subsidy demand on supply equation we get, Q = 255 o Subsidy Before tax, e. s= (A+B) P.S=CO+E) - After subsidy, c.s= (A + B + D + Ft G). P.S= (B + C +D+E) cost to Govt. = (B+ C + H+ G + F + D) 1. Because of subsidy, - eis p by (A + B + D + FtG)- (A+B) = (+F.+a)= x (20 - 14-5) * (200 +255) = $ 1251.25 P.is þ by (B + C + D +E) - (DE) = (B+C) = ₂ x (25.5 - 20) x (200 + 255) = $ 1251.25

Govt. Revenue & by (B+C+H+ G + f + D) = $ (25.5 - 14.5) * 255 (11 x 255) = $2805 DWL from subsidy is = area H. - * (255-200) = $ 302:15