The Commonwealth government decides to provide a subsidy of 30 for the buyers of bikes. Assume...

The Commonwealth government decides to provide a subsidy of 30 for the buyers of bikes. Assume that the market demand for bikes is given by: p = 300 – 2Q. Assume that the supply curve for bikes is given by p = 30 + Q. Which of the following statements is true?

a. Following the imposition of the subsidy the total price paid to sellers including the subsidy decreases by 10 and the deadweight loss that results from the subsidy is equal to 75.

b. Following the imposition of the subsidy the total price paid to sellers including the subsidy increases by 20 and the deadweight loss that results from the subsidy is equal to 0.

c. Following the imposition of the subsidy the total price paid to sellers including the subsidy increases by 10 and the deadweight loss that results from the subsidy is equal to 150.

d. Following the imposition of the subsidy the total price paid to sellers including the subsidy increases by 20 and the deadweight loss that results from the subsidy is equal to 150.

e. None of the above.

Solutions

Expert Solution

c. Following the imposition of the subsidy the total price paid to sellers including the subsidy increases by 10 and the deadweight loss that results from the subsidy is equal to 150.

Before subsidy:
At equilibrium: Demand = Supply. So, we get,
300 - 2Q = 30 + Q
So, Q + 2Q = 300 - 30
So, 3Q = 270
So, Q = 270/3 = 90
Q = 90

p = 30 + Q = 30 + 90 = 120
So, p =120

After subsidy: price paid by buyers decrease by 30. So, demand function changes to:
p - 30 = 300 - 2Q
So, p = 300 - 2Q + 30
So, p = 330 - 2Q
Now, at equilibrium, new demand = supply. So, we get,
330 - 2Q = 30 + Q
So, 2Q + Q = 330 - 30
So, 3Q = 300
So, Q = 300/3
So, Qs = 100

Price received by seller, Ps = 30 + Qs = 30 + 100 = 130
Price paid by buyer, Pb = 300 - 2Qs = 300 - 2(100) = 300 - 200 = 100

Change in price received by sellers = Ps - P = 130 - 120 = 10

Deadweight loss = area of triangle = (1/2)*base*height = (1/2)*(Qs - Q)*(Ps-Pb) = (1/2)*(100-90)*(130-100) = (1/2)*10*30 = 150

Rahul Sunny answered 2 years ago

Next > < Previous

Related Solutions

If a government decides that it will provide protection for a domestic industry, should the industry...

If a government decides that it will provide protection for a domestic industry, should the industry in question petition for protection in the form of quotas, tariffs, or subsidies? Do you think the type of protection the industry wants would differ from the type of protection the government would prefer?

Suppose a government decides to assist a domestic industry in international competition by offering that industry a subsidy for each unit of output it exports.

Suppose a government decides to assist a domestic industry in international competition by offering that industry a subsidy for each unit of output it exports. Who gains and who loses from among domestic producers, their workers, domestic consumers, and foreign producers and consumers of the product being subsidized?

Assume that the government decides to impose a tax on sellers of foods that are high...

Assume that the government decides to impose a tax on sellers of foods that are high in sugar content. a) Using a demand and supply diagram (half an A4 page), demonstrate and explain how such a tax that is imposed on sellers in fact creates a burden on consumers as well. Indicate the government revenue on your diagram. b) What is price elasticity of demand and how is it calculated? Briefly explain using diagrams, how price elasticity of demand will...

The government has decided to add a $10 subsidy in the market for Humbugs. The pre-subsidy...

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...

Suppose real output is at the potential level. Further assume that the federal government decides that...

Suppose real output is at the potential level. Further assume that the federal government decides that the current budget deficit is too high and passes a change in policy to eliminate the deficit. Everything else held constant, if the central bank enacts counter-cyclical policy, it will ______real interest rates. If the central bank does nothing, the inflation rate will ______, everything held constant. a. decrease, decrease b. increase, increase c. increase, decrease. d. decrease, increase

Suppose the government is considering implementing a child care subsidy for low-income single-mother households. This subsidy...

Suppose the government is considering implementing a child care subsidy for low-income single-mother households. This subsidy would provide low-income single mothers $5 per hour worked to spend on child care (and only child care). a. Is this child care subsidy equivalent to a wage subsidy to low-income single-mother households? Explain. (Note: assume that all low-income single-mothers use formal child care in order to work.) b. Why might the government want to regulate the quality of child care? What problems might...

"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)

Assume that we analyze the Mundell-Flaming model and that the government of big open economy decides...

Assume that we analyze the Mundell-Flaming model and that the government of big open economy decides to increase its public spending. How will it influence: domestic income, interest rate, and exchange rate, given that we face perfect capital mobility under flexible exchange rate regime?

9. Consider a case where the government decides to increase taxes on cigarettes. Assume a shape...

9. Consider a case where the government decides to increase taxes on cigarettes. Assume a shape of the supply and demand curves for cigarettes. Given your curves, how does the increase in tax change the amount of government tax revenue? Explain in words and graphically.

Now assume the government decides to set a price ceiling of $4 per gallon. Show and...

Now assume the government decides to set a price ceiling of $4 per gallon. Show and explain how this legal price affects your graph of the milk market. What objective could the government be trying to achieve by establishing such a price ceiling?

Subjects