1. Suppose that the current tuition (price) of an elite college education is $40,000 per year and 250,000 students are enrolled at these colleges per year. The government is considering subsidizing education by giving all students a grant of $5000 per year to enable more students to attend college. 21) Illustrate in a diagram the market clearing price and quantity traded after the government subsidizes education. Indicate in your diagram the net price paid by students (tuition less the grant) and the total price received by the colleges. The incidence of the benets on firms is dened to be the proportion of the subsidy received by the rms. The incidence is equal to the difference between the prices received before and after the imposition of the subsidy divided by the total value of the subsidy. Similarly, we can dene the incidence on consumers. b) C) d) g) h) In your diagram illustrate the incidence of the benets on rms, on students and the total cost of the subsidy to the government. If the government budgeted $1.25 million dollars for the cost of the subsidy (55K per student for 250K students) then did the government over estimate or underestimate the cost of the subsidy? Briey explain your answer. Derive the following formula for the incidence of a subsidy. dQ 0. ' For Q 0 s'dP .'dP Assuming that P3 = PD initially re-write the formula with elasticities as S D where .9 .9 as is the own price elasticity of supply and 5D is the own price elasticity of demand. If supply is perfectly inelastic then use the formula above to derive the incidence of the benets on colleges. In a new diagram below illustrate a perfectly inelastic supply in the market. Illustrate the incidence of the benets from the subsidy on students and colleges. If supply is perfectly inelastic then did the government policy succeed at getting more students into college? Did it succeed at making college more affordable