A perfectly competitive market is shown in the graph on the right. The equilibrium price and quantity are $6 and 4 units, respectively. The government institutes a price support program that works as follows. The support price is set at $7. At this price producers supply 5 units of the product. Rather than buy the excess supply, the government lets the market price fall to $4, at which point consumers purchase the entire amount supplied. The government pays suppliers the difference between the market price of $4 and the support price of $7 for each unit of the product produced and sold. As a result of this support program, consumer surplus (CS) and producer surplus (PS) both change as follows: CS and PS both increase. The increase in consumer surplus due to the support program is area C + D + E. The increase in producer surplus due to the support program is area A + B. Government spending on the support program is area
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What is the equilibrium price and quantity in the perfectly competitive market? - The equilibrium price is $6 and the equilibrium quantity is 4 units. Show more…
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