Suppose that the market for alcohol is regulated through price floors as the government is trying...
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Suppose that the market for alcohol is regulated through price floors as the government is trying to reduce the consumption of alcohol in the country. Consider the market for bottles of wine which is regulated by a price floor of 10. Aggregate demand and supply are QD = = 15 - p; and QS = 2p (a) (0.5 points) Compute excess supply in this market. Explain why there exists a mismatch between demand and supply. Suppose the government decides to buy and destroy the excess supply. Calculate consumer surplus, producer surplus and the cost of this program to the government. Furthermore, draw a diagram of supply and demand where you indicate consumer surplus, producer surplus and the cost of the program. (b) (0.5 points) Compute equilibrium price and quantity in this market in the absence of a price floor. Determine consumer surplus and producer surplus in the absence of a price floor. Compare to (a). (c) (0.5 points) Alternatively, the government can provide a per unit subsidy to consumers in such a way that supply and demand equate at a price of 10. Calculate the size of this per unit subsidy. Furthermore, draw a diagram of supply and demand where you indicate consumer surplus, producer surplus and the cost of the program. Also compute them analytically. Would this policy go against the initial goal set out by the government? (d) (0.5 points) Discuss other policy options that could help reduce the problem of overconsumption of alcohol in the country. Suppose that the market for alcohol is regulated through price floors as the government is trying to reduce the consumption of alcohol in the country. Consider the market for bottles of wine which is regulated by a price floor of 10. Aggregate demand and supply are QD = = 15 - p; and QS = 2p (a) (0.5 points) Compute excess supply in this market. Explain why there exists a mismatch between demand and supply. Suppose the government decides to buy and destroy the excess supply. Calculate consumer surplus, producer surplus and the cost of this program to the government. Furthermore, draw a diagram of supply and demand where you indicate consumer surplus, producer surplus and the cost of the program. (b) (0.5 points) Compute equilibrium price and quantity in this market in the absence of a price floor. Determine consumer surplus and producer surplus in the absence of a price floor. Compare to (a). (c) (0.5 points) Alternatively, the government can provide a per unit subsidy to consumers in such a way that supply and demand equate at a price of 10. Calculate the size of this per unit subsidy. Furthermore, draw a diagram of supply and demand where you indicate consumer surplus, producer surplus and the cost of the program. Also compute them analytically. Would this policy go against the initial goal set out by the government? (d) (0.5 points) Discuss other policy options that could help reduce the problem of overconsumption of alcohol in the country.
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The a 8 15p a p mis match exists price floor CS gol 1510 5 because of the the price floor has cr... View the full answer
Related Book For
Intermediate Microeconomics and Its Application
ISBN: 978-0324599107
11th edition
Authors: walter nicholson, christopher snyder
Posted Date:
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