Question

1. Given Canada’s domestic demand and domestic supply: P=50-(Q/3) P=10+(Q/3) If the government imposes a production...

1. Given Canada’s domestic demand and domestic supply: P=50-(Q/3) P=10+(Q/3)

If the government imposes a production subsidy of $5, how much is import after subsidy?

How much is consumer surplus after subsidy?

How much is producer surplus after subsidy?

How much is deadweight loss after subsidy?

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Homework Answers

Answer #1

Demand is Qd = 150 - 3P and supply is Qs = 3P - 30.

There is a subsidy of $5 per unit. Hence supply equation becomes Qs = 3(P + 5) - 30 or Qs = 3P - 15

Market equilibrium has Qs = Qd

3P - 15 = 150 - 3P

6P = 165

P = 27.50 (buyers pay)

P = 27.5 + 5 = 32.5  (sellers receive)

Q = 150-3*27.5 = 67.50

Consumer surplus after subsidy = 0.5*(50 - 27.5)*67.5 = 759.375

Producer surplus after subsidy = 0.5*(32.5 - 10)*67.5 = 759.375

DWL = 0.5*5*(67.5 - 60) = 18.75

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