Suppose that the market for laptops is monopolistically competitive. The long-run equilibrium price is $3000 for a laptop. Suppose that the laptop market is initially in long-run equilibrium. Assume that all businesses that make laptops are identical.

(a)On a diagram, illustrate the average total cost, marginal cost, marginal revenue and market demand for laptops in the long run. (1 mark)

The government decides to impose $500 subsidy for each laptop bought by the consumers.

(b)Without using a diagram, explain how the introduction of the subsidy will affect laptop producers in the short run and in the long run. Also explain how the subsidy will affect the market price of laptops and the total number of laptops sold in the short run and the long run. Will the subsidy lead to a larger change in equilibrium quantity in the short run or in the long run? Fully explain your answer. (4 marks)

(c)Donald, a politician, says that the introduction of a subsidy on laptops will reduce the size of the deadweight loss caused of the imperfectly competitive market. Could Donald be correct? There is no need to use any diagram. (3 marks)