"Refer to the Figure. If the government offers a $20 subsidy on the production of this...

"Refer to the Figure. If the government offers a $20 subsidy on the production of this good, what will be the new consumer surplus?"

(The blue S refers to the upward sloping blue line)

Solutions

Expert Solution

Lets formulate the problem first as the graph is missing in question.

Suppose in the Competitive market , the demand and supply curves initially determine the Equilibrium Point E where Equilibrium quantity is 30 units and Equilibrium price =$70.

Have a look at the graph------

The Consumer surplus is the shaded area ABE

CS is the difference between the price which the buyers are willing to pay and what they actually pay

Now if the govt provides subsidy ,the supply curve will shift rightward as the priducers are able to earn more.

The new supply curve S' intersects demand curve at point E',

New equlibrium Quantity = 35 units

New equlibrium price =$ 60

Consumers surplus will increase now

See graph------

The shaded area ADE' represents Consumers surplus and it is larger than the earlier.

Thanks...

Rahul Sunny answered 1 year ago

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