Assume that gasoline and ethanol are substitutes. Use the supply and demand model to describe the...

Assume that gasoline and ethanol are substitutes. Use the supply and demand model to describe the changes in these two markets (draw two graphs) if ethanol producers are subsidized.

Expert Solution

Sol :

If there are two goods Gasoline and ethanol.

And , if ethaonal goods is subsidised, then the following impact will happen in the market of the both the goods :

Market for Ethanol

Market for Gasoline

As, product get subsidy , whih means that cost of the producer is less than before subsidy. This will tends tthe producer to produce more ethanol than before.
So, increase in supply will shift the supply curve to the right.
Rightward shift in the supply curve will cretae a sitiation of excess supply in the market.
Excess supply will lower the prices of the product as new equilibrium is cretaed at lower prices and higher quantity .

Gasoline is the substitue of the ethanol , so when the prices of the ethanol decreases , demand for gasoline decreases
As , consumer prefer to buy more ethanol than gasoline.
So , decrease in demand means shift of demand curve to the left.

Rahul Sunny answered 2 years ago

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