Question

The demand and supply of ethanol are given by
*Q ^{D}* = 8,000 – 2,000

Answer #1

Demand QD= 8,000- 2,000 P

Supply QS= 1000 P - 1000

At equilibrium Supply = Demand

8,000- 2,000 P = 1000 P - 1000

9000 = 3000 P

P = 3

Equilibrium Price = 3

Equilibrium Quantity = 2000

if we subsidize it at 0.30

Total subsidy= 0.30*2

= 0.6

Demand at Price= 3.30

QD= 8,000 - 2,000 P

= 8,000- 2,000 * 0.3

= 8,000 - 6,00

= 2,400

Cost of subsidy = New quantity * Total susidy

= 2,400* 0.6

= 1440

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