Problem Set 4.docx.doc - Economics 110(01 Intro to Economic...

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Economics 110 (01) John P. Bonin Intro to Economic Theory Spring 2016 Problem Set #4: Market Intervention: Efficiency of Free Trade Due Date: Tuesday, February 16 in class A. Supporting California Wine Growers Recall that the demand for California wine is given by: Q D = 300 - 60 P D and that the supply from California producers is given by: Q S = 40P S . Remember that you calculated the market equilibrium values to be: P* = 3 and Q* = 120. (Re)Draw the diagram representing this market equilibrium with axes labeled and intercepts identified. 1. Calculate the price elasticity of demand for California wine at the equilibrium point. The U. S. government decides to support wine growers by adding an additional $1 per bottle subsidy to each bottle of wine purchased. An economic advisor tells wine growers that the “with-subsidy” supply equation is given by: Q S = 40(P+1) because P S = P+1. 2.Include the “with-subsidy” supply line on your diagram. At what value does this supply line intersect the quantity axis? 3. Determine the new with- subsidy value for the quantity transacted in the wine market. The subsidy means that consumers now pay a different price P D than producers receive P S because the government adds $1to the price paid by consumers.
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