Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
Chapter 8, Problem 8PA
To determine

The impact of subsidy on the commodity.

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In this module, we learned about deadweight loss and analyzed the welfare effects of a tax on a good.  Now consider the opposite policy.  Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer.  How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus?  Does a subsidy lead to a deadweight loss? Why or why not?
Suppose the vertical distance between points S and R represents a tax in the market. Please answer the questions under the case of the tax. What area is the tax revenue to the government? What is the amount of the tax revenue? What area is the consumer surplus represented by? What is the amount of consumer surplus? What area is the producer surplus represented by? What is the amount of producer surplus? What area is the deadweight loss represented by? What is the amount of deadweight loss? What is the buyers’ share of tax burden? What is the sellers’ share of tax burden?
A government intervenes in a market and as a result the demand curve shifts to the right. Which government measure could cause this effect? Pick a,b,c, or d  a. A subsidy granted to producers of the product  b. A subsidy granted to consumers of the product  c. The imposition of an indirect tax  d. The imposition of a direct tax
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  • This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good. For each unit of the goods sold, the government pays $2 to the buyer.   A) Use the black point (plus symbol) to indicate the initial equilibrium in this market before the subsidy. Then use the green point (triangle symbol) to shade the area representing consumer surplus, and use the purple point (diamond symbol) to shade the area representing producer surplus.   B) On the following graph, use the tan segment (dash symbols) to indicate the wedge formed between the price received by producers and the price consumers pay out of their own pocket. (Hint: Find the quantity to the right of the initial equilibrium where the difference between the supply and demand curves is $2.) Next use the black point (plus symbol) to indicate the price producers receive at that quantity, and use the grey point (star symbol) to indicate the price consumers…
    Richard and Henry like soda drinks. Henry's demand for soda is: P=10-Q; the demand for Richard is P=5.5-0.5Q. The supply of soda cans is perfectly elastic at P=1. The government imposes a tax on soda cans equal to t=$1 per can. a) Which consumer will suffer the greater loss of consumer surplus in response of the tax? why?b) Would the government prefer all consumers to be like Henry or like Richard if the government wants to maximise tax revenue? Why? Accompany your answer with a diagram to illustrate your argument.
    Suppose that the government imposes a tax on cigarettes, use the diagram below to answer the questions. D is the demand curve before tax, S is the supply curve before tax and ST is the supply curve after the tax.  For the market without the tax. Indicate  (I)price paid by consumers (Ii) price paid by producers (iii) quantity of cigarettes sold  (iv) buyer's reservation price (v) sellers reservation price (b) Calculate  the consumer surplus before the tax. (c) calculate the producer surplus before the tax.  (d) For the market for cigarettes with the tax, calculate (I) the tax (ii) price paid by consumers (iii) price recieved by producers (iv) quantity of cigarettes sold (e) (I) Calculate the consumer surplus after the tax.  (ii) calculate the producer surplus after the tax. (iii) the tax revenue (iv) deadweight loss (v) total surplus after tax
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