Question

Suppose that the government wishes to encourage the manufacture and sale of small cars.  The current supply and demand of small cars are: Q^s= – 10/9+ (1/9)P; Q^d= 100 – P, where Qis in millions of cars and Pis in hundreds of dollars.  What is the current equilibrium price and quantity of cars sold? Now, suppose that the government is considering two alternative plans for encouraging small car sales.  Under Plan A, every car manufacturer will receive a $500 rebate from the government for each car sold.  Under plan B, every purchaser of a small car will receive a $500 rebate from the government.  Which plan, A or B, is more effective?  Why?

Answer 1

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