Question

1. In the market for tea, quantity demanded is given Q = 5 – P/2 and quantity supplied is given by Q = P/2, where Q represents tonnes of tea per year. Suppose that the government provides a subsidy of $2 per ton of tea. After the introduction of the subsidy, the equilibrium price and quantity will be

2. Suppose that weekly demand for wool is given by P = 900 – Q, and supply is given by P = 2Q, where Q represents tonnes of wool. To support wool farmers, the government decides to impose a price floor of $400 per tonne. If the government agrees to buy any excess supply, it will have to spend _____ to buy _____ tonnes of wool.

Answer 1

1) after the subsidy the supply function becomes Q = (P + 2)/2 or Q = 0.5P + 1. at the new equilibrium the quantity demanded and quantity supplied are equal to each other

0.5P + 1 = 5 - 0.5P

P = 4

Q = 3 units.

The new equilibrium price is $4 and the new equilibrium quantity is 3 unit

2) quantity demanded at the floor price of 400 dollar is 500 units and quantity supplied is 800 units which means government has to purchase the surplus which is 300 units. And because subsidy is $400 government has to spend 400 X 300 = 120,000.

It will have to spend 120000 dollars to purchase 300 tons.