Question

Given that the demand for Swedish pancakes is Qd = 100 - 10P, and Supply is Qs = 10P.

A. Determine the initial equilibrium price and quantity

B. Now assume, after learning of research finding significant health benefits from a Swedish pancake diet, the government introduces a $1 per unit subsidy (i.e. s =$1, provided to producers). Calculate the impact of the subsidy on prices paid by consumers, prices received by producers and equilibrium output.

Answer 1

A)

Qd = 100 - 10P  

Qs = 10P  

Qd = Qs (Equilibrium)  

100 - 10P = 10P  

100 = 10P + 10P  

100 = 20P  

P = 5

Q = 10(5) = 50

B)

A subsidy s = 1 is given to producer then supply curve would be

Qs = 10(P + s )  

= 10(P + 1)  

= 10P + 10

Qd = Qs

100 - 10P = 10P + 10  

100 - 10 = 10P +10P  

90 = 20P

P = 4.5  

Price paid by consumers is 4.5

Price received by producers is 4.5 + 1 = 5.5

Q = 10(4.5) + 10 = 55

Equilibrium quantity is 55