The inverse demand for energy soda is P = 25 - 0.2Q. The supply for energy soda

Question

The inverse demand for energy soda is P = 25 - 0.2Q. The supply for energy soda is P = 6 + 0.8Q, where P is in thousands of dollars and Q is in thousands of sodas. The market for energy soda is perfectly competitive.

The equilibrium quantity in the market is 19 thousand sodas.

The equilibrium price in the market is 21.2 thousand.

The government wants to encourage alternative sources of carbohydrates and decides to offer energy soda producers a subsidy of $2 thousand per soda produced and sold. As a result, the new equilibrium quantity in the market will be ___ thousand sodas. The amount sellers will receive for each soda sold is $ ___ thousand. The amound buyers will pay for each soda purchased is $___ thousand. The deadweight loss caused by the subsidy is $___ million. (Round answers to one decimal place).

Explanation / Answer

The supply and demand after subsidy yield the equilibrium using the following equation:

(Price by demand curve) = (Price by supply curve) - (Subsidy per unit quantity)

or, 25 - 0.2Q = 6 + 0.8Q - 2

or, 25 - 0.2Q = 4 + 0.8Q

or, Q = 21

So, the new equilibrium quantity in the market will be _21_ thousand sodas.

Amount received by sellers:

Price under supply curve for (Q=21) :

6 + 0.8(21) = 22.8

The amount sellers will receive for each soda sold is $ _22.8_ thousand

Amount paid by buyers:

Price under demand curve for (Q=21) :

25 - 0.2(21) = 20.8

So, The amound buyers will pay for each soda purchased is $_20.8_ thousand

Deadweight loss is given by:

1/2 * (Price received by sellers - Price paid by buyers) * (New quantity - old quantity)

= 1/2 * (22.8 - 20.8) * (21-19) = 1/2 * 2 * 2

= 2

The deadweight loss caused by the subsidy is $_2_ million

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.