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A typical consumer's monthly demand for kilowatt hours (kwh) of electricity is given by D(p)=600
A typical consumer's monthly demand for kilowatt hours (kwh) of electricity is given by D(p)=600.00-2200.00p. Due to advances in renewable energy that have reduced barriers to entry, the supply of electricity can be considered as a perfectly competitive market, with a horizontal supply curve at price $0.08 per kwh
Part 1
What is the quantity consumed by a typical consumer in equilibrium?
Suppose that Congress wants to promote renewable energy and thus proposes a subsidy to consumers of $0.02 per kwh
What is the equilibrium quantity with the subsidy?
Part 2
What percentage of the gain from the subsidy goes to sellers?
What is the deadweight loss from the subsidy?
Expert Solution
Answer:
D(p) = 600 – 2200p
Horizontal Supply curve = 0.08
P = MC = 0.08
1]
If P = 0.08
D(p) = 600 – 2200(0.08) = 600 – 176 = 424
Quantity consumed by a typical consumer in equilibrium is 424
Subsidy = 0.02
Then New MC = 0.06
D(p) = 600 – 2200p
= 600 – 2200(0.06)
= 600 – 132 = 468
Equilibrium quantity with the subsidy is 468
2]
% of gain from subsidy goes to sellers = 0
Dead weught loss = ½ * 0.02 * (468-424) = 0.44
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