Question

The demand and supply of ethanol are given by qd = 8,000 – 2,000p and qs = 1,000p – 1,000, where p is price per gallon and q measures gallons per minute. if the government subsidizes ethanol at $0.30 per gallon, what is the deadweight loss?

Answer 1

Answer: Dead-weight loss is $30.

Step-by-step explanation: Equilibrium in a goods market is given by,

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Substituting this value of P into the demand equation we can find the equilibrium quantity.

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P=$3, Q=2000 without the subsidy.

At this quantity, value of government subsidy is

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Supply with subsidy is Qs= 1000(P+0.30) - 1000

Equilibrium is given by,

Qd= Qs

8000 - 2000P = 1000P + 300 - 1000

8700 = 3000P

P=$2.9 is price paid by consumers, but the sellers receive P + 0.30 = $3.2 per unit.

Q= 2,200

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