The government decides to place a 25 per unit-subsidy on the sales of books. The initial demand and supply curves for books in this country are respectively: Qd = 1000 - 2*P and Qs = 3*P + 500 where price in measured in Great British Pounds per book. a. What is the pre-subsidy equilibrium price and equilibrium quantity of books? Illustrate demand and supply curves and the market equilibrium in a diagram indicating the respective intercepts. What are Consumer and Producer Surplus in this market? Continued on next page.../ 3

b. How many books will be traded once the 25 subsidy is enacted? How much will consumers pay per book? Illustrate the effects of the subsidy on the equilibrium quantity and price of books in a diagram (you can use the diagram drawn in part a)). What are Consumer and Producer Surplus in this market with the subsidy in place?

c. What is the change in consumer and producer surplus following the introduction of this subsidy? Calculate the monetary value of these changes and identify the respective areas in your diagram.

d. Compared to the pre-subsidy equilibrium, what is the impact of this subsidy on the overall welfare in this market taking into account the cost of the subsidy?

e. Calculate the incidence of the subsidy across Consumers and Producers in percentage terms.