Exercise on subsidy done in class Nov 26_2010

Exercise on subsidy done in class Nov 26_2010 - PS is 300...

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Let the inverse demand for leather be P=100-2q and the inverse supply be P=20+6q (quantity is in tons and prices in dollars). What is the welfare effect of a subsidy to production of $10 per ton? Solution Note this exercise is virtually identical to that in the file Competitive Mrkt Applications.doc. Refer to that document for further details. Before the subsidy is imposed the ongoing price is $80 and the quantity produced is 10 (tons). The CS is 100 and the
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Unformatted text preview: PS is 300. The DWL is zero. The price after the subsidy is P=77.5 for an equilibrium quantity of 11.25. The PS is 379.6 and the CS is 126.5. Government expenditure is 112.5 while the deadweight loss is 6.25. Because of the subsidy, both the CS and PS increase, some DWL due to over production is created and of course the government is paying the cost of the subsidy. 20 10 P=20+6q 80 100 10 P=100-2q...
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