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Unformatted text preview: he producer surplus is the area between the supply curve and the price line, and is shown on the graph below in blue: With a $3 subsidy, we must find a place where the price producers receive, PS, is $3 greater than the price the consumers pay, PD. Since supply is perfectly elastic, the only quantity we should look at is Q = 5. Therefore, under the subsidy, PS = $8, PD = 5, and Q = 5. The producer surplus in this instance looks like this: Subtracting the first area from the section, we get the change in producer surplus, ACFH. The answer is A. 25. The cost of the government subsidy is equal to the amount of the subsidy, $3, times the quantity of goods subsidized, 5. That area is represented on the graph below in blue, ACHF. The answer is D. Subsidy 26. To answer this question we need to calculate the elasticity of demand. Note that weare given a change in price and a corresponding change in demand so price elasticity of demand can be calculated. The formula for this is ‐(% change in quantity)/(% change in price). (% change in Q) = (q2‐q1)/.5(q1+q2) = (5‐3)/.5(3+5) = 2/4. (% change in P) = (p2‐p1)/.5(p1+p2) = (9‐11)/.5(11+9) = ‐
2/10. So Elasticity of demand = ‐(% change in quantity)/(% change in price) = ‐(2/4)/(‐2/10) = 2.5. We call elasticities that are greater than 1 elastic, so A is the correct answer. If the elasticity was less than 1 we would call it inelastic and if it was equal to 1 we would call it unit elastic. To measure income elasticity we would need to know how quantity demanded responded to changes in income ‐‐‐ since we are given no information about income here we can't say anything about answers D or E. The answer is A. 27. Recall that the formula for elasticity of demand is ‐(% change in quantity)/(% change in price). The last row of the table gives % changes. Reading from the table we can see that %change in Q is ‐.05 and % change in P is .28. Therefore Elasticity of demand = ‐(% change in quantity)/(% change in price) = ‐(‐.05)/(.28) = .05/.28, and B is the correct answer. We say that this is a short run es...
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This note was uploaded on 10/09/2012 for the course ECON 1101 taught by Professor Someguy during the Spring '07 term at Minnesota.
- Spring '07