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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.
- Fall '13