# Problem_set2_answers - Econ 100 Winter 2012 Problem set 2...

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1 Econ 100 Winter 2012 Problem set 2 Due January 27 1. Consider that the U.S. supply of ethanol follows the function S ( p ) = 5p, and that the US demand for ethanol is D ( p ) = 13.5 – 2.5 p. Without any government role, there are 9 Billion gallons/year transacted at a price of \$1.80/gallon. a. Calculate the supply and demand elasticities at this market equilibrium point. Supply elasticity = dS(p)/dp * p/Q = 5*1.8/9 = 1 Demand elasticity = dD(p)/dp * p/Q = -2.5 * 1.8/9 = -.5 Now consider that the government is going to provide a subsidy of \$0.60/gallon in order to stimulate this market. In other words, the government will provide funds that allow the price paid by customers to be 60 cents/gallon lower than the price earned by suppliers. b. Using supply and demand curves, draw the equilibrium points before and after the provision of the 60 cent/gallon subsidy

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2 c. Calculate the new price earned by sellers, the price paid by customers, and the equilibrium quantity sold in the market (again with the 60 cent/gallon subsidy). Note that the subsidy can be thought of as a negative tax. Applying the standard formula gives Δ p customer = η ε Δ tax = 1 1.5 * .60 = \$0.4 So new price for buyers is 40 cents lower, or \$1.40/gallon. Change in price for sellers is the remainder not absorbed by customers, or \$0.20. New seller price is \$2.00/gallon. Method 2:
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Problem_set2_answers - Econ 100 Winter 2012 Problem set 2...

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