question archive The functions for supply and demand are: Demand P = 50 - 0
Subject:MarketingPrice:2.88 Bought3
The functions for supply and demand are:
Demand P = 50 - 0.25Q
Supply: P = 0.1Q
What would the competitive market equilibrium be if the government imposes a subsidy of $6?
A subsidy is a payment given to individuals or firms by the government in the form of cash or tax reduction. Subsidy provision aims to promote the consumption of a particular commodity or to remove a specific burden. It reduces the price payable by consumers and production costs incurred by producers. They tend to reduce market failure and efficient resource allocation.
Given the demand function as P=50-0.25Q (q=200-4p) and the supply function P=0.1Q (q=10p)
50-0.25Q=0.1Q
Q*=143;P*=14.3
When a subsidy is introduced, the new supply curve is q=10p+6
The new equilibrium level is 10p+6=200-4p
10p+4p=200-6
14p=194
P*=13.86: Q*=145
A subsidy reduces the price paid by consumers and increases the quantity supplied by producers.