Question

Consider the following market for board games: (Do NOT round values)

Qs= -20+4P Qd= 300-P

a) Calculate initial equilibrium supply and demand.

b) Calculate consumer and producer surplus. Show graphically.

c) Since board games make the world a better place, the government puts a $30 subsidy on all board games. Recalculate new equilibrium prices and quantity.

d) Show (c) in a graph and calculate consumer surplus, producer surplus, government cost and deadweight loss. Show these in the graph.

Answer 1

Given Qs= -20+4P Qd= 300-P, equilibrium is attained at a point where demand = supply.

(a) Thus, -20 + 4P = 300 - P

which gives P = 64 and Q = 236

(b) Consumer surplus = 1/2(300-64)(236) = 27848

Producer surplus = 1/2(64-5)(236) = 6962.

(c) a subsidy of $30 will result in a fall in marginal cost by $30. Thus, new supply curve, Qs = 10 + 4P

New equilibrium: Qs = Qd

10 + 4P = 300 - P

which gives P = 58 and Q = 242.

(d) New consumer surplus = 1/2(300 - 58)(242) = 29282

New producer surplus = 1/2(58)(242) = 7018

Government cost = (30)(242-236) = 180

and deadweight loss = 1/2(242 - 212)(64-58) = 90