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Homework answers / question archive / 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

Economics

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?

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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