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Unformatted text preview: Answer : The subsidy shifts the supply curve down by $0.50, as if costs fell by $0.50 per gallon. The demand curve and the new supply curve intersect at the equilibrium price P = $2 and quantity 72 gallons. b. Calculate and graph consumer surplus, producer surplus, and total economic surplus. Would producers support the subsidy? Would consumers support the subsidy? Answer : Consumer surplus is 0.5 ($3.5 - 2) (72) = $54. Producer surplus is 0.5 ($2 - 0.5) (72) = $54. The subsidy payment required is $0.5 (72) = $36. Total economic surplus is $54 + 54 = $108, not counting the subsidy payment, or $108 - 36 = $72 counting it. Producers would support the subsidy if their other taxes do not go up by more than $54 - $37.5 = $16.50 to finance the subsidy, and similarly for consumers....
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- Spring '08