Consider a perfectly competitive market where the market demand and supply are given by QD=550-50P and Q S = 62.5P - 12.5 (a) Calculate the equilibrium price and quantity. (b) Compute the consumer, producer, and total surplus for this market. (c) Suppose all the firms in the market have identical cost functions and now the government gives producers a subsidy of $2 per unit of output sold. Draw the effect on the demand and supply curves, with quantity on the horizontal axis and the price on the vertical axis. Compute the new equilibrium price and quantity, the consumer and producer surplus, and the government expenditure on the subsidy. Comparing the government expenditure with the sum of the change in consumer surplus and producer surplus, explain your findings.

Consider a perfectly competitive market where the market demand and supply are given by QD=550-50P and Q S = 62.5P - 12.5 (a) Calculate the equilibrium price and quantity. (b) Compute the consumer, producer, and total surplus for this market. (c) Suppose all the firms in the market have identical cost functions and now the government gives producers a subsidy of $2 per unit of output sold. Draw the effect on the demand and supply curves, with quantity on the horizontal axis and the price on the vertical axis. Compute the new equilibrium price and quantity, the consumer and producer surplus, and the government expenditure on the subsidy. Comparing the government expenditure with the sum of the change in consumer surplus and producer surplus, explain your findings.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter24: Perfect Competition

Section: Chapter Questions

Problem 10E

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