Question

Suppose that the government gives a $10 per unit subsidy to sellers of Humbugs. The pre-tax price of Humbugs was $50. There are no additional social benefits to encouraging the consumption of Humbugs. If, at the original equilibrium price, the elasticity of demand was -0.5 and the elasticity of supply was 2, which of the following is true? Consumers will receive relatively more benefits than firms. Consumers and producers will split the benefits of the subsidy equally. Firms will receive relatively more benefits than consumers. All benefits from the subsidy will go to consumers. All benefits from the subsidy will go to producers. Which of the following statements is correct about the overall effect of the subsidy? Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers. The subsidy will clearly improve welfare for society as a whole. The subsidy will cost the goverment more than the net benefit to consumers and producers. U Only producers will be better off. Both consumers and producers will be better off. Only the government will be better off.

I really just need assistance w/the multiple choices. I think:

"The subsidy will cost the government more than the net benefit to consumers and producers" is correct as well as

"Both consumers and producers will be better off"

Answer 1

MCQ option will be:

- Both consumers and producers will be better off

A subsidy lowers market price and increases market quantity, thus increasing both consumer surplus (CS) and producer surplus (PS).

Before subsidy,

Total surplus (TS1) = CS1 + PS1

After subsidy,

Total surplus (TS2) = CS2 + PS2 - Cost of subsidy

A subsidy creates deadweight loss, which arises when TS2 < TS1, i.e.

CS2 + PS2 - Cost of subsidy < CS1 + PS1

(CS2 - CS1) + (PS2 - PS1) < Cost of subsidy, i.e.

Change in CS + Change in PS < Cost of subsidy.

This does not mean that sum of absolute values of CS2 and PS2 must be lower than Cost of subsidy.