In a competitive market, the industry demand and supply curves are P = 70 - QD and P = 40 + 2QS, respectively.
a. Find the market’s equilibrium price and output.
b. Suppose that the government provides a subsidy to producers of $15 per unit of the good. Since the subsidy reduces each supplier’s marginal cost by 15, the new supply curve is P = 25 + 2QS. Find the market’s new equilibrium price and output. Provide an explanation for the change in price and quantity.
c. A public-interest group supports the subsidy, arguing that it helps consumers and producers alike. Economists oppose the subsidy, declaring that it leads to an inefficient level of output. In your opinion, which side is correct? Explain carefully.

  • CreatedJanuary 30, 2013
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