Question

The government has decided to add a $10 subsidy in the market for Humbugs. The pre-subsidy price of Humbugs was $50, and neither supply nor demand is perfectly elastic nor perfectly inelastic.

1. Which of the following is true?

A The price of Humbugs will fall to $40.

B The full benefit from the subsidy will go to buyers of Humbugs.

C The price of Humbugs will fall by less than $10.

D The equilibrium quantity of Humbugs will decrease due to the lower price.

E The full benefit from the subsidy will go to the sellers of Humbugs.

2. Who receives the greatest benefit from the subsidy depends on:

A. whether the subsidy is given to buyers or sellers.

B. the relative elasticity of the supply and demand curves.

C. what the government requires firms to charge.

D. whether demand is elastic or inelastic.

E. whether supply is elastic or inelastic.

Answer 1

1.
The correct answer is "option C "
C The price of Humbugs will fall by less than $10.

Subsidies decrease the production costs of firms which results in an increased supply. This leads to a fall in prices. Since the demand and supply curves are neither perfectly elastic nor perfectly inelastic, so the fall in the price of Hambugs will be less than $10.

2.
The correct answer is "option B "
B. the relative elasticity of the supply and demand curves.

The elasticity of demand/supply can be defined as the degree of responsiveness of quantity demanded/supplied of a product to a change in the price of the product. The benefits of the subsidy depend upon the relative elasticity of the demand as well as the supply curves.