Question

In: Economics

A quantity subsidy is a subsidy per unit sold of a given good. The subsidy is...

A quantity subsidy is a subsidy per unit sold of a given good. The subsidy is paid by the government and can be given either to the consumers or the producers.

(a) What is the relationship between the price buyers pay and the price sellers receive when the subsidy equals s? What is the condition for equilibrium in this market? Does it matter whom the subsidy is given to?

(b) Suppose that the subsidy is given to the producers. How will the supply curve shift? Draw a carefully labeled diagram showing the new equilibrium - the price for the buyers, the price for the sellers, and the equilibrium quantity sold qs.

(c) Suppose that the subsidy is given to the buyers. How will the demand curve shift? Draw a carefully labeled diagram showing the new equilibrium - the price for the buyers, the price for the sellers, and the equilibrium quantity sold qs.

(d) What determines who benefits more from the subsidy? (Hint: one way to measure the relative benefit from the subsidy is by the ratio (p∗−pb)/(ps−p∗).

(e) Add to your diagram the consumer and producer surplus before and after the subsidy. Show the cost to the government resulting from the subsidy in the new equilibrium.

(f) Show the deadweight loss. Explain why the deadweight loss occurs. (Hint: relate your answer to the rise of inefficient transactions caused by the subsidy).

Solutions

Expert Solution

a) The relationship between buyer's price and seller's price is :

Buyer's price + Subsidy = Seller's price

Condition for equilibrium in this market is Demand = Supply.

Here, the equilibrium price is P and the equilibrium quantity is Q.

Yes. it matters whom the subsidy is given as explained in b and c below.

b) When subsidy is given to the sellers, supply curves shifts to the right to S' as shown in the diagram below. As a result equilibrium quantity increases to QS. Price for sellers is denoted by PS whereas, price for buyers is denoted by PB.

c) When subsidy is given to buyers , the demand curve shifts to the right to D' as shown in the diagram below. As a result equilibrium quantity increases to QS. Here, the price for buyers is denoted by PB and the price for sellers is denoted by PS.

d) To determine the benefits of subsidy to the sellers and buyer we calculate the ratio of (P-PB)/(PS-P).

If the ratio is greater than 1 , buyers are benefited more.

If the ratio is less than 1, sellers are benefited more.

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

Suppose there is a $3.00 per unit subsidy given to consumers. Draw the after-subsidy demand curve.
a. Suppose there is a $3.00 per unit subsidy given to consumers. Draw the after-subsidy demand curve. Instructions: Use the tool provided (S2) to draw the after-subsidy demand curve. Be sure your endpoints are at Q = 0 and Q = 180. b. Plot the after-subsidy price paid by consumers and the after-subsidy price received by sellers. Instructions: Use the tools provided to draw the after-subsidy price paid by consumers (After-subsidy Pc) and the after-subsidy price received by sellers (After-subsidy Ps). c. Draw...
For the US export subsidy program: Assuming an export subsidy is paid on a per unit...
For the US export subsidy program: Assuming an export subsidy is paid on a per unit basis for products sold outside of the US, other things equal, we would expect that a) expected price of product in US would: Increase, Decrease, It Depends b) expected quantity produced in US would: Increase, Decrease, It Depends c) expected price of product outside of US would: Increase, Decrease, It Depends d) expected quantity sold outside of US would: Increase, Decrease, It Depends
Given the following information: Demand: Qd = 200 – 5P Supply: Qs = 5P If a quantity tax of $2 per unit sold is imposed
Given the following information:Demand: Qd = 200 – 5PSupply: Qs = 5PIf a quantity tax of $2 per unit sold is imposed,(a)Considering that the government will earn revenue, overall, do you think that thesociety benefits from the imposition of the tax? Explain.(b) Calculate the equilibrium market price and the equilibrium quantity sold.(c) Determine the demand and supply equation after the tax.(d) What will be the new equilibrium price paid by the buyers and the new pricereceived by the supplier?(e) Calculate...
The price for good A increases from 12 to 15. The quantity sold of good B...
The price for good A increases from 12 to 15. The quantity sold of good B decreases from 150 to 136. What elasticity can you compute given this information? Compute it using the mid-point formula. What can you tell about the nature of the goods?
The price and quantity of A, an inferior good, sold decreased after a shock to the...
The price and quantity of A, an inferior good, sold decreased after a shock to the market. What could explain this change? A) An increase in price of B (a complementary good for A) B) An increase in price of C (a substitute good for A) C) A decrease in the income of A consumers D) All of the above are correct E) Both a and c are correct F) Both a and b are correct G) Both b and...
Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents...
Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents who send their child(ren) to childcare. Assume there are no other subsidies in operation in the industry. a. [10 marks] Examine the effects of this subsidy on consumers, produces and the wider market. b. [10 marks] Anecdotal evidence suggests that the number of children attending childcare services has NOT increased. How could you explain this?
Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents...
Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents who send their child(ren) to childcare. Assume there are no other subsidies in operation in the industry. Examine the effects of this subsidy on consumers, produces and the wider market. Anecdotal evidence suggests that the number of children attending childcare services has NOT increased. How could you explain this?
Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents...
Consider a perfectly competitive market for childcare. Recently a per unit subsidy was provided for parents who send their child(ren) to childcare. Assume there are no other subsidies in operation in the industry. a. [10 marks] Examine the effects of this subsidy on consumers, produces and the wider market. b. [10 marks] Anecdotal evidence suggests that the number of children attending childcare services has NOT increased. How could you explain this? Use graphs to explain if needed.
4. If a product can be sold for $850 per unit, the variable cost per unit...
4. If a product can be sold for $850 per unit, the variable cost per unit is $380 and the fixed costs are $2,350,000, how many units must be produced and sold to achieve the breakeven? Show your calculations. (1 point)
1. Let’s think about a per unit production subsidy. Start with an initial equilibrium price of...
1. Let’s think about a per unit production subsidy. Start with an initial equilibrium price of $5 and quantity of 100 million. Now provide producers with a $1 per unit subsidy. Shade in (the cost of) the subsidy, make up numbers for the new quantity exchanged, the price consumers face (Pc) and the price producers get (Pp). Ideally you can do this without simply copying it from the book... try it over several days until you can. 2. The goal...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT