Homework Answers
a) Equilibrium occurs when demand equals supply. It occurs without subsidy when price is $40 and quantity traded is 30 units.
With susbidy, it occurs when price is $35 and quantity traded is 40 units.
Producer surplus with subsidy is sum of all portions of A + B + C + D + E whose sum is (1/2) * (40 - 0) * (50 - 10) = 800
b) Deadweight loss under subsidy is area of triangle K whose sum is (1/2) * (40 - 30) * (50 - 35) = 75
c) Under free trade, 30 units are traded in the market and equilibrium occurs when price is $40 and quantity traded is 30 units.
Consumer surplus under free trade is sum of portions of F + D whose sum is (1/2) * (70 - 40) * (30 - 0) = 450
Producer surplus under free trade is sum of portions of A + B + C whose sum is (1/2) * (40 - 10) * (30 - 0) = 450
Total surplus under free trade = Consumer surplus under free trade + Producer surplus under free trade
= 450 + 450 = 900
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$30,000
$24,000
$27,000
$26,500
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$40
$30
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$60
$50
$70
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A $30 per unit production subsidy would cost how much to
taxpayers?
$30,000
$24,000
$27,000
$26,500
A $30 per unit production tax would generate how much tax
revenue?
$30,000
$24,000
$27,000
$26,500
A $30 per unit subsidy given to the producer would result in what
new market price for consumers?
$20
$10
$40
$30
A $30 per unit tax on the producers would result in what new
market price for consumers?
$60
$50
$70
$55
How much consumer surplus is...
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