Question

Given that the demand for hot pockets is Qd = 100 – 10p, and supply is Qs = 10p.

a. Determine initial equilibrium price and quantity

b. Now assume, after learning of research finding significant health benefits from a hot pocket 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.

c. Determine the impact on consumer and producer surplus form the introduction of the subsidy.

d. What is the tax payer cost of the subsidy?

e. The research of positive health effects is quickly debunked but, yielding to the lobbying power of the hot pocket industry, the government decides to continue the subsidy. Does the continued subsidy lead to an inefficiency? If so, determine the magnitude of the inefficiency.

Answer 1