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Concept Question 5
Concept Question 5.1 The govemment wants to help the mohair sweater industry by giving producers a specific subsidy of $1.00 per mohair sweater. Suppose that the market demand isgiven by: Qd = 1000 - 18p
and the market supply is: Qs= - 240 + 40p. How much will the subsidy cost taxpayers? The cost to taxpayers is $ (Round your answer to the nearest penny)
Expert Solution
Computation of Cost to Taxpayer:
Given,
Supply Curve:
Q = -240+40P
Q+240 = 40P
P = 0.025Q + 6
After Subsidy
P = 0.025Q + 6 - 1
P = 0.025Q + 5
0.025Q = P-5
Q = 40P - 200
Equating with the demand for equilibrium after subsidy
40P - 200 = 1000-18P
40P+18P = 1000+200
58P = 1200
P = 1200/58
P = $20.69
Q = 40P - 200
= 40*$20.69 - 200
= $827.59 - 200
Q = 627.59
Cost of Subsidy = Q*subsidy
= 627.59*1
= $627.59
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