Question

The original demand (Qd = 600 - 100P) and supply (Qs = 50P) and analyze this new intervention, the subsidy. The subsidy works like this: each tomato seller receives a 3-dollar refund for each tomato sold.

• Write down the equation for the new "effective supply" curve.

• Determine the new equilibrium quantity and equilibrium price.

• What is the price that the consumers will pay for their tomatoes? What is the price that the producers will effectively earn for their tomatoes, inclusive of the subsidy?

• Graphically depict the new equilibrium complete with (solved) values for the new price and quantity. (Label the original supply as S1 and the new “effective supply” as S2).

Answer 1

After the subsidy of $3 per tomato sold the supplier will now get $(P + 3) for each tomato he sells. So the in the new supply function we need to replace P with (P +3) and the supply function becomes,

Qs = 50(P + 3)

Qs = 150 + 50P

So the new effective supply curves becomes,

Qs = 150 + 50P

To calculate the new equilibrium quantity and price we need to calculate the new supply function equal to demand curve since demand is equal to supply at equilibrium.

Qs = Qd

150 + 50P = 600 - 100P

50P + 100P = 600 - 150

150P = 450

P = 450/150

P = $3.

So the new equilibrium price is equal to $3.

And now to calculate the new equilibrium quantity we need to put P = 3 in either new supply function or demand function, since at equilibrium demand is equal to supply.

Putting P = 3 in New supply function we get,

Q = 150 + 50×P

Q = 150 + 50×3

Q = 150 + 150

Q = 300

So the new equilibrium quantity is equal to 300 tomatoes.

Comsumers are going to pay the market price since they are not getting subsidy. So the consumers will pay $3 for each tomato.

But producers are going to get $(P +3) for each tomato so they will get, (3 + 3) = $6 per for each tomato inclusive of the subsidy.

In the diagram below we have prices on Y axis and quantity on X axis.

The initial supply curve is depicted as S1 = 50P and the new supply curve is depicted as S2 = 150 + 50P. And the demand curve is drawn as given.

The new equilibrium is at point E where the new supply curve and demand curves intersects. The new equilibrium price is at $3 and the new equilibrium quantity is at 300.

I hope I was able to help you, thank you.