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2. The government recently instituted a program that subsidizes drugs for senior citizens. Using
supply and demand graphs, analyze the effect of this subsidy on (i) the total quantity of drugs
purchased; (ii) the price paid by seniors; (iii) the price received by drug companies.
(Hint: Recall that in the case of a tax PD = PS + t, so that PD > PS. A subsidy is a negative tax. In
the case of a subsidy (s), PD = PS – s, so that PD < PS. )
3. Compare the effects of the following two alternative policies on the equilibrium price and
quantity consumed of cocaine, as well as on the government budget, relative to a policy of...
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- Fall '08
- Consumer Surplus