E202Exam2.11

E202Exam2.11 - Answer : The subsidy shifts the supply curve...

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c. Calculate and graph the total economic surplus lost as a result of the price ceiling. Answer : The total economic surplus lost due to the price ceiling is $75 - $72 = $3. It is the area between the demand and supply curves, and between the new quantity exchanged and the equilibrium quantity. 0.5 ($2.5 - 2) (60 - 48) = 0.5 ($0.5) (12) = $3. d. Is it possible for consumer surplus to fall in response to a price ceiling? Explain. Answer : Yes, if the price ceiling is set very low, quantity supplied could fall enough so that the cost savings consumers enjoy is outweighed by the reduction in quantity exchanged. In the extreme, if the price ceiling were set at $1, consumer surplus would be zero! 6. Refer to Problem 4. Suppose the government decides instead to subsidize gasoline by $0.50. Sellers receive a subsidy of $0.50 for every gallon of gasoline sold. a. What is the equilibrium price and quantity with this subsidy?
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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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