Suppose initially Malaysia does not trade durians. The perfectly competitive price for durians in Malaysia is RM60 per kg. Suppose the government decides to provide a subsidy of RM10 per kg to consumers.

Using a diagram, show the effect of this government policy. How does it affect the price of durians in Malaysia? What is the effect on consumers and producers’ surplus and government revenue? Show the gain or loss in the welfare (if any) on the diagram.

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Initially the market was in equilibrium at point A where the equilibrium price is RM60 p... View the full answer