The ideal answer for application 2

The ideal answer for application 2 - 2-The farmers adjust...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
The ideal answer for application 2: General tips to answer graph problems: 1- You should draw the graph and show the whole story on it. 2- You should describe the graph in different paragraphs, not in a whole one paragraph. 3- Make it feel like a story, that has a beginning, a problem and always at the end of your answer introduce a solution even if the question didn’t ask you for a solution. The answer: Draw the subsidy graph and show the efficiency at price 3 and the price set by the government 5, induced the farmers to increase the quantity produced and thus lead to distortion in efficiency. 1- The efficiency price is 3 per pound, at which the MSB = MSC.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 2-The farmers adjust their production cost at this price. 3-The government introduces the subsidy program by setting a higher price 5 $. 4-This increase in price induced the suppliers to increase the quantity produced from Q* to Qs (over production), and also lead to decrease their private cost of producing by the amount of subsidy. 5-At A (the new production point), we don’t have efficiency because the MSC>MSB. 6-This over production could be solved by pushing the farmers to decrease their production by decreasing the price....
View Full Document

This note was uploaded on 11/20/2009 for the course PUBLIC FIN no id taught by Professor Ahmed during the Spring '09 term at City.

Ask a homework question - tutors are online