Question

Suppose each of the 1 million Islandian households has the same demand curve for heating oil. How much consumer surplus would each household lose if it had to pay $2 per gallon instead of $1 per gallon for heating oil, assuming there were no other changes in the household budget?

Instructions: Enter your response rounded to two decimal places.

$  per year.

With the money saved by not subsidizing oil, by how much could the Islandian government afford to cut each family’s annual taxes?

Instructions: Enter your response rounded to two decimal places.

$  per year.

If the government abandoned its oil subsidy and implemented the tax cut, by how much would each family be better off?

Instructions: Enter your response rounded to two decimal places.

$  per year.

What would be the aggregate change in consumer surplus for the 1 million Islandian households if the subsidy were lifted for the benefit of a tax reduction?

There would be an aggregate  (Click to select)  gain  loss  of $  million per year, so the subsidy is  (Click to select)  efficient  inefficient  .

The government of Islandia, a small island nation, imports heating oil at a price of $2 per gallon and makes it available to citizens at a price of $1 per gallon. Islandians' demand curve for heating oil is given by: P= 6-Q, where Pis the price per gallon in dollars and Q is the quantity in millions of gallons per year. This demand curve is shown in the diagram below. Demand for heating oil in Islandia Price ($/gallon) 1 2 3 4 5 6 7 Quantity (millions of gallons/year)

Answer 1

Demand came for each household! Lost suplus Q (gallyn) (1) with without subridy consumer surplus = Area of DADE subsidy Consumer soples - Area of DARC Difference - Area of A BC Ed = $14.50 per year (2) Gort. heating Subsidy per family = (4 gallon) (5 gallonslyn) . $15.00 per year - $5 per year (6) Saving in tax = Lossin consumer $5 sweplus- & 4.50 - gain = $5- $4.50 pe as $4.50 per year . Net - $ (о: ro) е ги (2) There would be aggregate (gain of 0.50 So the subsidy is refficient).

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