Question

UUHU UUTTUI answer A-C): Question 5: The demand and supply functions for a good are Pa = 360 - 2Q, and P, = 96 + 4Qs, respectively. If the government provides a subsidy of $12 per unit sold. Outline the distribution of the subsidy, that is, calculate how much of the subsidy is received by the consumer and the producer. A: The consumer now pays $268, a decrease of $4 on the equilibrium price with no subsidy ($272) and the producer receives $280, an increase of $8 on the equilibrium price with no subsidy B. The consumer now pays $280, an increase of $8 on the equilibrium price with no subsidy ($272) and the producer receives $268, a decrease of $4 on the equilibrium price with no subsidy C. The consumer now pays $266, a decrease of $6 on the equilibrium price with no subsidy ($272) and the producer receives $278, an increase of $6 on the equilibrium price with no subsidy D. The consumer now pays $276, an increase of $4 on the equilibrium price with no subsidy ($272) and the producer receives $264 a decrease of $8 on the equilibrium price with no subsidy E, none of the above Choose the correct answer (A-E): Question 6

Answer 1

Option (A).

Before subsidy, Pd = Ps.

360 - 2Q = 96 + 4Q

6Q = 264

Q = 44

P = 360 - 2 x 44 = 360 - 88 = 272

After subsidy, subsidy increases supply, shifting supply curve rightward by $12 at every output. So,

Ps = 96 + 4Q - 12 = 84 + 4Q

Setting Pd = new Ps,

360 - 2Q = 84 + 4Q

6Q = 276

Q = 46

P = 360 - 2 x 46 = 360 - 92 = 268 (price paid by buyers)

Price received by sellers = 268 + 12 = 280

So, price paid by buyers decreased by (272 - 268) = 4, and price received by sellers increased by (280 - 272) = 8.