Question

The demand and supply of ethanol are given by Q^D = 8,000 – 2,000P and Q^S = 1,000P – 1,000, where P is price per gallon and Q measures gallons per minute. What does it cost the government to subsidize ethanol at $0.30 a gallon?

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