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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A subsidy is the opposite of a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 for each cone purchased; with a $0.50 subsidy for the buyers of ice-cream cones, the government pays buyers $0.50 for each cone purchased.

  1. a. Show the effect of a $0.50 per cone subsidy on the demand curve for ice-cream cones, the effective price paid by consumers, the effective price received by sellers, and the quantity of cones sold.
  2. b. Do consumers gain or lose from this policy? Do producers gain or lose? Does the government gain or lose?

Subpart (a):

To determine
The equilibrium price and quantity.

Explanation

Figure -1 shows the impact of subsidy.

In Figure 1, horizontal axis measures quantity and vertical axis measures price. Curve S indicates supply and the curve D indicates demand. The market is in equilibrium at point E1 where the initial demand curve D1 intersects with the supply curve S1...

Subpart (b):

To determine
The equilibrium price and quantity.

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