The market demand for (pairs of) socks is given by D(P) = 170 – 3P and the market supply is characterized by S(P) = P– 30. In both expressions, P is the price per unit of a pair of socks. The government introduces a per unit subsidy of S per pair of socks, that is paid out to the producer for each sale of a pair of socks. a) What is the equilibrium price and quantity before the government intervenes in the market? b) What is the equilibrium price and quantity after the government intervenes in the market imposing a per subsidy S > 0? Hint: You have to find the equilibrium for all relevant levels of S c) Calculate changes in consumer surplus, producer surplus and welfare, as a function of subsidy S, due to the introduction of the subsidy. What welfare conclusion(s) do you draw? d) Illustrate graphically.

The market demand for (pairs of) socks is given by D(P) = 170 – 3P and the market supply is characterized by S(P) = P– 30. In both expressions, P is the price per unit of a pair of socks. The government introduces a per unit subsidy of S per pair of socks, that is paid out to the producer for each sale of a pair of socks. a) What is the equilibrium price and quantity before the government intervenes in the market? b) What is the equilibrium price and quantity after the government intervenes in the market imposing a per subsidy S > 0? Hint: You have to find the equilibrium for all relevant levels of S c) Calculate changes in consumer surplus, producer surplus and welfare, as a function of subsidy S, due to the introduction of the subsidy. What welfare conclusion(s) do you draw? d) Illustrate graphically.

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Description: 3. The market demand for (pairs of) socks is given by D(P) = 170 – 3P and the market supply is characterizedby S(P) = P–- 30. In both expressions, P is the price per unit of a pair of socks. The government introducesa per unit subsidy of S per pair o

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The market demand for (pairs of) socks is given by D(P) = 170 – 3P and the market supply is characterized
by S(P) = P–- 30. In both expressions, P is the price per unit of a pair of socks. The government introduces
a per unit subsidy of S per pair of socks, that is paid out to the producer for each sale of a pair of socks.
a) What is the equilibrium price and quantity before the government intervenes in the market?
b) What is the equilibrium price and quantity after the government intervenes in the market imposing a per
subsidy S > 0? Hint: You have to find the equilibrium for all relevant levels of S
c) Calculate changes in consumer surplus, producer surplus and welfare, as a function of subsidy S, due to
the introduction of the subsidy. What welfare conclusion(s) do you draw?
d) Illustrate graphically.

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