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1. a. Explain the social efficiency by taking into account consumer surplus and producer surplus. (20 point) b. Consider a free market with demand equal
1. a. Explain the social efficiency by taking into account consumer surplus and producer surplus. (20 point) b. Consider a free market with demand equal to Q-1200 - 10P and supply equal to Q-20P. What is the value of consumer surplus? What is the value of producer surplus? (5 point) c. Now the government imposes a $10 per unit subsidy on the production of the good. What is the consumer surplus now? The producer surplus? Why is there a deadweight loss associated with the subsidy, and what is the size of this loss? (5 point) 2. Consider an income guarantee program with an income guarantess of $6000 and a benefit reductions rate of %50. A person can work up to 2000 hours per year $8 per 8 hour a. Draw the person's budget constraint with the income guarantce. (5 point) b. Suppose that the income gurantee rises to $9000 but with a 75% reduction rate. Draw the new budget constraint. (5 point) Which of these two income guarantee programs is more likely to discourage work? Explain. (5 point) C
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