Consider a competitive market with aggregate demand 0 if p 80 D(p)= 800-10p if p ...

 

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Consider a competitive market with aggregate demand 0 if p 80 D(p)= 800-10p if p <80 and aggregate supply 0 if p 50 S(p)= 5p-250 if p> 50 1. Find the competitive equilibrium price p" and equilibrium quantity traded Q. The government introduces a per-unit subsidy of s = $10 per unit traded. Hence, the price paid by consumers, PD, is no longer the same as the price received by producers. ps. The two prices differ by the amount of the subsidy and producers receive a higher price than consumers pay, ps - PD = s. 2. Solve for the equilibrium prices, pp and ps, and quantity Q" with the subsidy. 3. How does the equilibrium quantity with the subsidy compare to that without any interventions? 4. Plot the relevant aggregate demand and supply curves together in one graph. Draw one graph from the consumer's perspective (p = pp) and another one from the producer's perspective (p = ps). Clearly mark all important points that you have identified in all previous parts of the exercise. 5. What sources of deadweight loss exist due to the subsidy? In your graphs, identify and mark the area that represents the deadweight loss due to the subsidy. Government spending (the cost of the subsidy) is subtracted from the sum of producers' and consumers' surplus to obtain net total surplus. Describe the bounds of the DWL area and compute the DWL. Consider a competitive market with aggregate demand 0 if p 80 D(p)= 800-10p if p <80 and aggregate supply 0 if p 50 S(p)= 5p-250 if p> 50 1. Find the competitive equilibrium price p" and equilibrium quantity traded Q. The government introduces a per-unit subsidy of s = $10 per unit traded. Hence, the price paid by consumers, PD, is no longer the same as the price received by producers. ps. The two prices differ by the amount of the subsidy and producers receive a higher price than consumers pay, ps - PD = s. 2. Solve for the equilibrium prices, pp and ps, and quantity Q" with the subsidy. 3. How does the equilibrium quantity with the subsidy compare to that without any interventions? 4. Plot the relevant aggregate demand and supply curves together in one graph. Draw one graph from the consumer's perspective (p = pp) and another one from the producer's perspective (p = ps). Clearly mark all important points that you have identified in all previous parts of the exercise. 5. What sources of deadweight loss exist due to the subsidy? In your graphs, identify and mark the area that represents the deadweight loss due to the subsidy. Government spending (the cost of the subsidy) is subtracted from the sum of producers' and consumers' surplus to obtain net total surplus. Describe the bounds of the DWL area and compute the DWL.