Consider a perfectly competitive market where the market
demand and supply are given by
Q D = 550 - 50P and Q S = 62.5P - 12.5
(a) Calculate the equilibrium price and quantity.
(b) Compute the consumer, producer, and total surplus for this
market.
(c) Suppose all the firms in the market have identical cost
functions and now the government gives producers a subsidy of
$2 per unit of output sold. Draw the effect on the demand and
supply curves, with quantity on the horizontal axis and the price
on the vertical axis. Compute the new equilibrium price and
quantity, the consumer and producer surplus, and the
government expenditure on the subsidy. Comparing the
government expenditure with the sum of the change in consumer
surplus and producer surplus, explain your findings.
