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Efficiency cost

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The inverse market demand curve is P=140-Q, and the inverse supply curve is P=20+Q. Now suppose a commodity subsidy of $20 is given for each unit of production. In this new distorted market equilibrium, compute the following:

1. equilibrium demand price
2. equilibrium supply price
3. equilibrium quantity
4. the additional value of consumption, relative to the undistorted equilibrium (i.e.)
(the equilibrium without the commodity subsidy).
5. the additional resource cost, relative to the undistorted equilibrium (i.e) without subsidy
6. the increased consumer surplus relative to the undistorted equilibrium (i.e) without
subsidy.
7. the increased producer surplus relative to the undistorted equilibrium (i.e) without
susbidy.
8. The subsidy payment in dollars.
9. The efficiency cost of the subsidy relative to the undistorted equilibrium (ie) without
subsidy.

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Solution Summary

Efficiency cost is found. The expert examines commodity subsidy effects on consumer/producer surplus.

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The inverse market demand curve is P=140-Q, and the inverse supply curve is P=20+Q. Now suppose a commodity subsidy of $20 is imposed on each unit of production in this market. In the new distorted market equilibrium, compute the following:

1. equilibrium demand price
Please see #3

2. equilibrium supply price
Please see #3

3. equilibrium quantity
PS - PD = Amount of subsidy
Or 20 + Q - 140 + Q = 20
Or 2Q = 140, which gives Q = 140/2 = 70
At Q = 70, PD = 140 - 70 = $70
At ...

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