Question

How much will the Government spend on the subsidy? What will be the change in producer surplus?

if the demand is P = 585 – 2Q
  & supply is P = 25 + 2Q, what is the      equilibrium price and quantity in this market?  
  Q=140
  P=305

To enable more citizens to buy more gasoline, the Government decides to give gasoline producers a subsidy of $12 per unit– Using the supply and demand equations from #2 (above). What price will consumer’s pay and how much gasoline will they buy? How much will the Government spend on the subsidy?   What will be the change in producer surplus?

Answer 1

After subsidy:

New Supply:

P = 25 - 12 + 2Q = 13 + 2Q

Demand: P = 585 - 2Q

At new equilibrium: Demand = Supply

13 + 2Q = 585 - 2Q

Q = 143 (quantity of fasoline bought) and P = 299 (Price consumers pay)

Government spend on subsidy = 12 x 143 = 1716

Change in producer surplus:

= (311 - 305) x (143 + 140) x 0.5 = 849