Econ 1 PS3.tmp

# Econ 1 PS3.tmp - distance between the D 1 and of D 2 curves...

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ECON 1 Problem Set 3 Solutions

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ECON 1 Problem Set 3 Solutions See the note below
ECON 1 Problem Set 3 Solutions Chapter 7 NOTE FOR PROBLEM # 11. As we saw in lecture, the Demand curve hasn’t really changed (i.e. it doesn’t shift). The demand curve labeled D 2 reflects buyers’ demand as a function of the after-subsidy price. Thus, buyers’ demand hasn’t really changed: At each quantity, the height of D 1 is still the maximum amount of money that buyers are willing to spend per unit, while the height of the D 2 curve is the maximum price that buyers will accept being aware that the good is subsidized. At any Q, the vertical

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Unformatted text preview: distance between the D 1 and of D 2 curves equals the subsidy. In other words, the subsidy (the toothpick) works like a coupon. For example: suppose that when price of your favorite chocolate bar is \$1, you demand 10 bars per month; however, if there is a \$.20 subsidy for the buyers (coupon) per chocolate bar, at Q = 10 your willingness to pay will be \$1.20 per bar, because you know that the actual amount of money that you get out of your pocket for each of your chocolate bars is \$1. ECON 1 Problem Set 3 Solutions ECON 1 Problem Set 3 Solutions ECON 1 Problem Set 3 Solutions...
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Econ 1 PS3.tmp - distance between the D 1 and of D 2 curves...

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