Question

1. [25 points] A supply and demand model is described by the following equations: Demand: P a bQd Supply: P =-c + da Equilibrium: Qd Qs Rewrite the equations of the model in the case where a subsidy of s dollars per unit is placed on production of the good. This means that for every unit that firms sell, the government gives them s dollars. [Hint: if P is the price paid by consumers, what is the price received by producers? Plug this price into the supply equation.] For the model that includes the subsidy, list the endogenous variables, the exogenous v assume a, b, c, d> 0, are there additional restrictions on the values of the parameters? Explain. Solve the model for the equilibrium values of P and Q. Identify the price the seller receives and the price the buyer pays. Show your results graphically and label all intercepts and slopes. es and the parameters. If we

Answer 1

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