Question 3

Suppose there is a small island nation with no international trade but capable of growing many types of fruit.Consider the market for bananas 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 Qd = 600 - 100P while supply is described by Qs = 50P.

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

Graphically depict this outcome.

Question 4

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

Thus, start with the original demand (Qd = 600 - 100P) and supply (Qs = 50P) and analyze this new intervention, the subsidy. The subsidy works like this: each banana seller receives a 3 dollar refund for each banana 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 bananas? What is the price that the producers will effectively earn for their bananas, inclusive of the subsidy?

Graphically depict the new equilibrium complete with (solved) values for all new price and quantity. (Label the original supply as S1 and the new "effective supply" as S2)