Question

It considers that the following equations represent the supply and demand of honey in the national market. Answer the following questions:

?? = 400−2? ?? = 1/2?

a. Suppose the government wants to encourage honey consumption for more bees. For the above, the government decides to give a subsidy of a tax of 10 pesos is applied for each unit sold of honey, calculates the new market amount. Tip: Remember the equilibrium condition of the supply and demand model and proceed in a very similar way as if it were a tax, only that consumers will now pay a lower price.

b. Is the amount of subsidy paid by the Government greater or less than increases in consumer surplus? What would you call this difference?

Answer 1

A) with subsidy on consumption, the market demand curve shifts by amount of subsidy

New demand curve

Qd = 400-2*(P-10)

Qd = 400+20 -2P

Qd = 420 - 2P

So at new eqm

420-2P = .5P

420 = 2.5P

so Price received = 420/2.5 = 168

new price paid = 168-10 = $158

new Q = 420-2*168 = 84

b) total amount of subsidy paid = 84*10

= $840

original eqm, Qd = Qs

400-2P = P/2

P* = 160,

Q* = 80

.

original CS = .5*(200-160)*80 = 1600

New CS = .5*(200-158)*84 = 1764

So rise in CS = 1764-1600 = $164

.

thus amount of subsidy paid is greater than the rise in CS

this difference is called Dead weight loss