In a perfectly competitive market, the market demand and market supply curves are given by Qd = 1000 −10Pd and Qd = 30Ps. Suppose the government provides a subsidy of $20 per unit to all sellers in the market.
a) Find the equilibrium quantity demanded and supplied; find the equilibrium market price paid by buyers; find the equilibrium after-subsidy price received by firms.
b) Find the consumer surplus and producer surplus in the absence of the subsidy. What is the net economic benefit in the absence of a subsidy?
c) Find the consumer surplus and producer surplus in the presence of the subsidy. What is the impact of the subsidy on the government budget? What is the net economic benefit under the subsidy program?
d) Does the subsidy result in a deadweight loss? If so, how much is it?