QD=200-10p and QS=10p.
Find how much the equilibrium price and quantity changes after the subsidy. [Hint: Be careful how you incorporate the per-unit subsidy in the function that changes.]
a.)
A subsudy will cause the supply curve to shift to the right, from OC to ED in the diagram. This is because the cost to the producers reduces when the subsidy is given to the producers. The diagram is as follows -
b.)
The new price is P2 (falls from P1 to P2) and the new quantity is Q2 (rises from Q1 to Q2)
c.)
Change in consumer surplus: P2P1FG (increases)
Change in producer surplus: P4KFP1 (increases)
Government expenditure: P4KGP2 (increases)
Deaweight loss: FKG
d.)
Now, after the subsidy, we get the supply curve as -
Therefore, price decreases by $2 and quantity increases by 20 units.
Change in consumer surplus: P2P1FG (increases)
Change in producer surplus: P4KFP1 (increases)
Government expenditure: P4KGP2 (increases)
Deaweight loss: FKG
In the above diagram, we get the value of P4 by putting Q=120 in the supply curve before subsidy is added -
Hence, we get -
Change in consumer surplus: 1/2 x (100+120) x 2 = 220
Change in producer surplus: 1/2 x (100+120) x 2 = 220
Government expenditure: 4 x 120 = 480
Deaweight loss: 480 - (220 + 220) = 40
A subsidy is a benefit given by the government to groups or individuals, usually in the...
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