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Consider a free market with demand equal to Qd = 900 – 10P and supply equal...

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Economics

  1. Consider a free market with demand equal to Qd = 900 – 10P andsupply equal to Qs = 20P.

    1. What is the value of consumer surplus (CS) when the market is inequilibrium? What is the value of producer surplus (PS) when themarket is in equilibrium?

    2. Graph the supply and demand curves and identify the equilibriumprice and quantity on your graph. Show CS and PS on your graph ofthe demand and supply curves.

    3. Now suppose the government imposes a $15 per unit subsidy on theproduction of the good. What is the consumer surplus now? Theproducer surplus? Why is there deadweight loss associated with thesubsidy, and what is the size of this loss?

    4. Explain in your own words what deadweight loss is and why it isrelevant in the study of public sector economics.

Answer & Explanation Solved by verified expert
3.8 Ratings (697 Votes)
a At the equilibrium we haveQd Qs900 10P 20P900 30PP 90030P 30 per unitQ 900 1030 600 unitsCS 05maximum price price buyers payqty purchased 0590010 30600 18000PS 05price sellers receive minimum priceqty sold 0530    See Answer
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