(5) On the market for wine, the private demand curve is given as PD=200-2Q. The supply curve is given as PS= 10+0.5Q.
(a) what is the free market outcome (price and quantity)? What is the overall surplus?
(b) Now assume farmers “need” a price of P=60 and the government were to buy the quantity needed to reach this price. Calculate the new quantity and price? What is the governments expenditure? Calculate the deadweight loss of this policy.

(c) Now assume the government went to a regime of production quotas with income compensation that leads to the same price. Calculate the production quota needed to reach P=60 and the resulting DWL of this policy.

Answer rating: 100% (QA)

a To find the free market outcome equilibrium price and quantity we need to set the demand PD equal to the supply PS and solve for Q PD PS 200 2Q 10 0... View the full answer