Question

A market is defined by the following equations: Qd=10-(1/10)P, AND Qs=-2+(1/10)P, where P is in £. (a) Find the equilibrium price and quantity. (b) The government grants a subsidy of £20 per unit. Derive the new supply function and calc the price paid by consumers, the price recieved by producers and the new equil quantity. (c) Calc the change in condumer expenditure, the change in firm rev., and gov expendeture. and the change in consumer surplus, producer durp and welfare loss.

Answer 1

I am not going to solve this for you as that is your job to do. However, you should know that at equilibrium the DEMAND and the SUPPLY curve are equal and have the same point solution. Therefore if you take the two equations and set them equal to one another, combine any like terms, simplify and then solve for the Price and then obtain the quantity. That will give you the equilibrium point.

For part B determine the new Supply curve and then recalculate as above for the new Equilibrium.

For the change in Consumer Surplus you need to caculate the old and new areas (the triangles) that represent the old and new Consumer Surplus.

If you can do this, you are on your way to the answer to the problem. wmw