Question

10.19. In a perfectly competitive market, the market demand curve is Qd = 10 -p, and the market supply curve is Q 1.5P a) Verify that the market equilibrium price and quantity in the absence of government intervention are Pd= P 4 and Qd Q 6. b) Consider two possible government interventions: (1)A price ceiling of $I per unit; (2) a subsidy of $5 per unit paid to producers. Verify that the equilibrium market price paid by consumers under the subsidy equals $1, the same as the price ceiling. Are the quantities supplied and demanded the same under each government intervention? = c) How will consumer surplus differ in these different government interventions? d) For which form of intervention will we expect the product to be purchased by consumers with the highest willingness to pay? e) Which government intervention results in the lower deadweight loss and why?

Answer 1

1019. a) Equilibrium: Q² = Q . or, 10-pd. "spor a, !0 = 3:5P ::P=4 } proved . .a.65 proved b) supply with subsidy: Q*: 15CP+5) -67.5 +15P . . Equilibrium: Qs = Qd . 9, 15P+ 7.5 = 10 - A . or, 2.5 p. 3925 ipso I (Proved) :: Q = 9 (1) under price ceiling quantity trasacted is, &p= 15 (2) under subsidy : a = 9 Then the quantity is a not same under two interventions. Consumer swepus in (1) CS, (10-83 * 1.5 * +(951x1.5 12.375 consumer surplus in (2) CS2 = ţ * (10-1)*9= 40:5 consumere sweptus in higher under (2) subsidy. d) In case of co the willingness to pay for the marginal consumee in 8 5 white that for (2) is . The ty under (1) product is pwechased by consumer with highere . Wellingness to pay.

(e) . under in dead weight loss ini DWL.= ţ x (8.5 -1) *46-15) = 16.875 under ca] de aid weight loss is: DWL = x 5 x (9-6) = 7:5 The dead weight loss is higher undere price ceiling. Because the difference between WTP under and p under (1) is higher (75) than it is in under to (2) (subsidy = 5). Hence, the later creates a lesser DWL than the former.