HW chap 15-5

# Withthesubsidythemarketpricewillfallto016afterreceivin

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Unformatted text preview: \$3.02. PS = \$4.20. AS = \$7.22. When the government imposes the \$0.7 subsidy, the price to consumers decreases. Thus the quantity increases, but since the CS gain is less than the cost of the subsidy, there is a deadweight loss due to the additional units, as shown in the graph below. With the subsidy, the market price will fall to \$0.16. After receiving the subsidy, the price that producers take home is \$0.86. The new quantity will be 6. New CS = (0.5)(3.48 – 0.16)(6) = \$9.30 billion. New PS = (0.5)(0.86 – 0.56)(6) = \$0.84 billion. Cost of the subsidy to the government = –(0.7)(6) = \$3.92 billion. New AS = New CS + New PS – Cost to government = 6.22 billion. Calculate deadweight loss (DWL)...
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## This note was uploaded on 01/22/2014 for the course ECO 3352 taught by Professor Ax during the Fall '13 term at Troy.

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