Homework answers / question archive / You should wait to tackle this question until after lecture on Thursday, September 17

You should wait to tackle this question until after lecture on Thursday, September 17

Economics

Share With

You should wait to tackle this question until after lecture on Thursday, September 17.) In recent years, the government has started to subsidize the installation of solar panels. Suppose the subsidy takes the form that customers are sent a check by the government for a certain amount for each solar panel installed. (That is, you can think of the subsidy as a negative tax physically paid to consumers.) Since there are many small firms that install panels, we can think of this market as perfectly competitive. For simplicity, assume that before the introduction of the subsidy, the market was in long-run equilibrium. a. What effect, if any, will the introduction of the subsidy have on the market demand and supply curves for solar panel installation? What will be the short-run effect of the subsidy on the number of panels installed, the price received by sellers, and the price paid by buyers? b. Explain whether you agree or disagree with the following statement: "Even though the subsidy is paid to customers, customers and firms share the subsidy in the short run." c. Show in your supply and demand diagram the total amount that the government spends on the subsidy in the short run. Is this amount more, less, or equal to the equilibrium quantity before the introduction of the subsidy times the subsidy per panel (or is it not possible to tell)? d. What does the subsidy do to the amount of installation and the profits of a typical installation firm in the short run? e. What will happen to the equilibrium price and quantity in the long run? Why? What will happen to the profits of a typical installation firm in the long run?