Hi, I wanted to see if I answered this question correctly. Below are the questions and then below that are my answers. One thing I wasn't sure on was what the total cost of what the government would spend. I did it based on the producer selling price at $5 (equilibrium price of $2 +$3 subsidies) * 100,000 (difference in quantity between S1 and S2).

Question 3

Suppose there is a small island nation with no international trade but capable of growing many types of vegetables.Consider the market for tomatoes on this island (and for our purposes, suppose the currency on this island nation is called dollars, a very original name).

Assume the demand for tomatoes of Q_d = 450 - 100P while supply is described by Q_s = 50P where P is the price in dollars per kilogram of tomatoes; and Q is the quantity of tomatoes, expressed in thousands of kilograms.

Calculate the equilibrium price and quantity in the market for tomatoes.

Graphically depict this outcome, labeling the demand curve as D₁ and supply curve as S₁.

Question 4

Suppose the government of the island has decided to give consumers a more attractive price for tomatoes by imposing a fixed, per unit subsidy.

Thus, start with the original demand (Q_d = 450 - 100P) and supply (Q_s = 50P) and analyze this new intervention, the subsidy. The subsidy works like this: each tomato seller receives a 3-dollar refund for each kilogram of tomatoes sold.

Write down the equation for the new "effective supply" curve.

Determine the new equilibrium quantity and equilibrium price.

What is the price that the consumers will pay for their tomatoes?

What is the price that the producers will effectively earn for their tomatoes, inclusive of the subsidy?

How much will the government spend on tomato subsidies in this case in total? (Recall the units of measurement: P is the price in dollars per kilogram of tomatoes; and Q is the quantity of tomatoes, expressed in thousands of kilograms.)

Graphically depict the new equilibrium complete with (solved) values for the new price and quantity. (Since the original supply is labeled as S₁, please label the new "effective supply" as S₂).