## Practice question: subsidies

The monthly supply and demand functions for milk are given as follows

Qs = -5 + 8P Qd = 10 - 2P

Where Qs and Qd are the quantities in thousands of litres and the price is the price per litre in $

a) Calculate Qs and Qd at a price of $2 per litre.

b) What is the value of the resulting surplus or shortage at this price?

c) Use the equations to calculate the equilibrium price and quantity.

d) Graph the two curves on graph paper. Identify the Q intercept for the demand curve, the P intercept for the supply curve and the equilibrium price and quantity.

e) Calculate the value of the consumer surplus and the producer surplus at the equilibrium price.

f) The government gives producers a subsidy of $0.50 per litre. State the new supply function, draw the new supply curve and calculate the new equilibrium price and quantity.

g) Why has the price not gone down by $0.50?

h) How much of the $0.50 subsidy has the consumer received? What does this tell you about price elasticity of demand for milk over this price range?

i) Calculate the value of PED over this range.

j) Explain how the subsidy is shared by producers and consumers.

k) Calculate the value of producer revenue before and after the subsidy.

l) Calculate the new values of the consumer surplus and the producer surplus.

m) Calculate the value of the subsidy paid by government and the size of the deadweight loss.

n) Why might the government wish to subsidise milk? Give two valid reasons.

Qs = -5 + 8P Qd = 10 - 2P

Where Qs and Qd are the quantities in thousands of litres and the price is the price per litre in $

a) Calculate Qs and Qd at a price of $2 per litre.

b) What is the value of the resulting surplus or shortage at this price?

c) Use the equations to calculate the equilibrium price and quantity.

d) Graph the two curves on graph paper. Identify the Q intercept for the demand curve, the P intercept for the supply curve and the equilibrium price and quantity.

e) Calculate the value of the consumer surplus and the producer surplus at the equilibrium price.

f) The government gives producers a subsidy of $0.50 per litre. State the new supply function, draw the new supply curve and calculate the new equilibrium price and quantity.

g) Why has the price not gone down by $0.50?

h) How much of the $0.50 subsidy has the consumer received? What does this tell you about price elasticity of demand for milk over this price range?

i) Calculate the value of PED over this range.

j) Explain how the subsidy is shared by producers and consumers.

k) Calculate the value of producer revenue before and after the subsidy.

l) Calculate the new values of the consumer surplus and the producer surplus.

m) Calculate the value of the subsidy paid by government and the size of the deadweight loss.

n) Why might the government wish to subsidise milk? Give two valid reasons.