Question One

Suppose that a government has decided to subsidise manufacturers of bicycles (maybe to help encourage more cycling because of cheaper high-quality bikes). The inverse demand for bicycles is initially given by P = 500 - 0.1Q^D

The inverse supply is P = 200 + 0.1Q^S

1. Calculate the equilibrium price and equilibrium quantity in this market.

1. Calculate the producer surplus and consumer surplus.

1. Suppose the government now offers a $100 per unit subsidy to bicycle manufacturers. Alter the equation for the inverse supply curve to reflect this subsidy.

1. With the subsidy in place, how many bicycles will be sold? What will be the price of a bicycle for a buyer? What price will sellers get?

1. What will the subsidy program cost the government? What will be the net effect of the subsidy on total surplus in society?

Question Two

The market for cookies is represented by the following supply and demand conditions: Q^D = 1,000 - 200P and Q^S = 400P - 200, where P is price per box of cookies and Q measures boxes per day.

(It will help to draw a diagram. You can include this as part of your working.)

1. Solve for the equilibrium price and quantity.

1. Suppose the government places a quota of 500 boxes per day on cookies. Solve for the equilibrium price and quantity. (2 marks)

1. Calculate consumer surplus before and after the quota.

1. Calculate producer surplus before and after the quota.

1. Calculate the deadweight loss from the quota.