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Given a demand curve of P = 118 - 1.5Q and a supply curve of P...

Given a demand curve of P = 118 - 1.5Q and a supply curve of P = 4 + 1.5Q, with a subsidy of 54, solve for the cost to the government of implementing the subsidy.

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Answer #1

The following diagram shows the market. Supply curve is given in blue color. Demand curve before and after tax are given in red and green color respectively.

After subsidy, the demand becomes: P-54 = 118 - 1.5Q

The equilibrium price is the price where new demand and supply intersects.

172 - 1.5Q = 4+1.5Q

3Q = 168

Q = 56 units

Therefore, 56 units are purchased.

Cost to government = quantity sold * amount of subsidy = 56 * 54 = $3024

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