Suppose the demand and the supply for lumber (harvested wood processed in a sawmill) used for construction in Australia are given by QD =100 – 2P QS = 1/2P Assume also that the market is perfectly competitive 7. Steel is a substitute for lumber in construction. Now suppose the price for steel rises. Use a graph of supply and demand to show what happens in equilibrium. Show changes relative to the original equilibrium you found. 8. the government introduces a subsidy of s=5 per unit of lumber transacted in the market. Calculate the new equilibrium quantity and the price paid by consumers and received by producers 9. Given the subsidy in 8, calculate and illustrate in a graph the consumer surplus, producer surplus and subsidy expenditure. 10. Calculate the deadweight loss caused by the subsidy in 8 and illustrate it in a graph. 11. Who benefits more from the subsidy, consumers or producers? Why?
Suppose the
7. Steel is a substitute for lumber in construction. Now suppose the price for steel rises. Use a graph of
8. the government introduces a subsidy of s=5 per unit of lumber transacted in the market. Calculate the new
9. Given the subsidy in 8, calculate and illustrate in a graph the
10. Calculate the
11. Who benefits more from the subsidy, consumers or producers? Why?
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