ECON1110_HW5_Solution

# ECON1110_HW5_Solution - Introductory Microeconomics ECON...

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Introductory Microeconomics – ECON 1110 Homework Assignment #5 Suggested Solution 1. The following table lists the unit, marginal value in dollars (MV) and marginal cost in dollars (MC), for gasoline. Unit MV MC 1 10 4.00 2 9 4.50 3 8 5.00 4 7 5.50 5 6 6.00 6 5 6.50 7 4 7.00 8 3 7.50 9 2 8.00 10 1 8.50 a. What is the initial consumer and producer surplus? Unit MV MC CS PS 1 10.00 4.00 4.00 2.00 2 9.00 4.50 3.00 1.50 3 8.00 5.00 2.00 1.00 4 7.00 5.50 1.00 0.50 5 6.00 6.00 0.00 0.00 Thus the consumer surplus is \$10.00 and the producer surplus is \$5.00. b. The government decides to subsidize production and pays a subsidy of \$3 per unit of the good produced and sold. What is the resulting price demanders pay, consumer surplus, the price suppliers receive, producer surplus, consumer surplus, gains from trade, deadweight loss, and government expenditures? Unit MV w/ subisidy MC CS PS 1 13.00 4.00 6.00 3.00 2 12.00 4.50 5.00 2.50 3 11.00 5.00 4.00 2.00 4 10.00 5.50 3.00 1.50 5 9.00 6.00 2.00 1.00 6 8.00 6.50 1.00 0.50 7 7.00 7.00 0.00 0.00 Thus demanders pay \$4.00 and suppliers receive \$7.00. The consumer surplus is \$21.00, and the producer surplus is \$10.50. Government expenditure is \$21.00. Thus gains from trade is \$21.00+\$10.50-\$21.00=\$10.50. The deadweight loss is \$4.50. c. The government changes its mind and decides to pay the \$3 subsidy to demanders. What is the resulting price equilibrium quantity and consumer surplus?

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The results are the same no matter who receives the subsidy. 2. Consider the market for corn. In the long run, corn is perfectly elastically supplied. a. Draw a diagram indicating the initial equilibrium price, consumer surplus, and producer surplus. b. Now demonstrate the effect on deadweight loss and producer surplus if the government begins paying a subsidy of \$2 per unit of corn produced and sold.
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