Nov16QzNotes - Econ 200 AD/AI quiz section notes Sui...

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Econ 200 AD/AI quiz section notes Sui Luo/Fall 09 Econ200 AD/AI Nov.16 Notes for quiz section on Nov. 16 ( Readings: Textbook 5.2~5.4; Lecture notes 11~12) In the following graphs, the red (purple) line represents the price level of the consumer (supplier). 1. The effect of tax/subsidy on the social welfare. Example 1.1: Consider the market for chicken in the U.S. The equilibrium price and quantity of chicken is shown as point E in the graph below (both S and D curves are “symmetric”—slopes are 45 degrees): Price per lb Supply a. Now suppose the government enacts a subsidy of $1 per unit to the suppliers of chicken. Show the new equilibrium market price and quantity on the graph. Before the subsidy, the market equilibrium locates at point E. New equilibrium=point E’, market price=$3.5 , new quantity=100.5) What is the subsidy cost to the government? ( Subsidy cost = BE’FG = $1*100.5=$100.5) Who receives most of the subsidy? The consumer saves $0.5, and the producer gets paid another $0.5. They share the $1 subsidy equally. Here, the consumer and supplier are facing with difference price level. Demand Q of chicken in lbs per week $4 100 $3 P’=$3.5 $4.5 G Supply’ D B C E
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Econ 200 AD/AI quiz section notes Sui Luo/Fall 09 For the supplier, MC=P+1. His marginal cost of production doesn’t really change with the subsidy. He actually has a change in the source of income. After the subsidy, his income comes from not only the consumer, but also the government. The shift of the supply curve only reveals a change in the price offered to the consumer.)
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Nov16QzNotes - Econ 200 AD/AI quiz section notes Sui...

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