The small island of Usagishima has a perfectly competitive market for petrol. The supply curve for petrol
Question:
The small island of Usagishima has a perfectly competitive market for petrol. The supply curve for petrol is upward sloping and the demand curve for petrol is downward sloping. The equilibrium price of petrol is $3 per litre with 10,000 litres bought and sold per month.
(a) Using a diagram, illustrate the perfectly competitive equilibrium in the Usagishima petrol market. Use your diagram to label the level of consumer surplus, producer surplus and social surplus at this equilibrium.
(b) The government of Usagishima has decided that the price of $3 per litre for petrol is too high. Misaki argues for a subsidy, “If we subsidise the price of petrol by $1 per litre, then buyers will only have to pay $2 per litre, and it will only cost the government $1 on the 10,000 litres, which is $10,000 per month”. Do you agree with Misaki’s statement? Justify your answers. Use a diagram to show the likely outcome of a $1 subsidy on petrol. Explain (and show in a table) the “before-and-after” effects of the subsidy on consumer surplus, producer surplus, and social surplus.
Social Media Marketing A Strategic Approach
ISBN: 978-0538480871
1st edition
Authors: Melissa Barker, Donald I. Barker, Nicholas F. Bormann, Krista E. Neher