FinalExam_PracticeEssay1

# FinalExam_PracticeEssay1 - ECON 251 Maymester 2009 Based on...

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ECON 251 Maymester 2009 – Based on Exam from Fall 2008 Essay Question Practice Essay 1 1. Consider a generic market with the demand curve given by 25 d Q P = - and supply is given by 1 2 2 s Q P = - + . The government decides that the market equilibrium price is too high, and thus will subsidize consumer \$2 per unit. Please answer the following parts : a. What is the original equilibrium before the subsidy? Calculate the equilibrium price and quantity in the market and show them graphically. (2 Points) b. What is the new market equilibrium after the subsidy is implemented? Calculate the price consumer now pay for the good, and the price producers receive for the good, the new equilibrium quantity and illustrate them graphically. Also, identify (numerically and graphically) the difference in the price received by producers before and after the subsidy and, identify (numerically and graphically) the difference in the price paid by consumers before and after the subsidy. (3 Points) c. What is the total of subsidy payments from the government to consumers numerically and graphically? (1 Point) d. Explain how the relationship between the price elasticity of demand and the price elasticity of

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## This note was uploaded on 02/06/2012 for the course ECON 251 taught by Professor Blanchard during the Summer '08 term at Purdue.

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FinalExam_PracticeEssay1 - ECON 251 Maymester 2009 Based on...

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