Question

the flu vaccination market has the demand and supply curves given by the following data. (all quantities are in thousands.) price per vaccination $10 $15 $20 $25 $30 qd 90 80 70 60 50 qs 50 60 70 80 90 a. plot the demand and supply curves, and determine the equilibrium price and quantity. b. show the areas of consumer and producer surplus. c. now suppose that each vaccination given generates an external benefit, as those who do not get vaccinated are less likely to get the flu when others do get vaccinated. as a result, suppliers receive a $10 subsidy from the government for each vaccine. for example, if consumers pay $10 per vaccination, suppliers receive $20, so only $10 from consumers is required to induce suppliers to offer 70,000 vaccinations per month. plot the new supply curve. d. determine the new equilibrium price and quantity. e. does the price fall by the full amount of the subsidy? if not, explain why. f. what is the total amount that consumers now pay for the new equilibrium quantity of vaccinations?

Answer 1

The equilibrium price and quantity are $20 and 70,000 respectively. The areas of consumer and producer surplus are $50,000 each. The new equilibrium price and quantity with a supply subsidy are $25 and 80,000 respectively. The price does not fall by the full amount of the subsidy.

Step-by-step explanation:

a. To plot the demand and supply curves, first create a graph with the price ($10, $15, $20, $25, $30) on the y-axis and the quantity (90, 80, 70, 60, 50) on the x-axis. Connect the points to form the demand curve and the supply curve. The equilibrium price is the price at which the quantity demanded equals the quantity supplied, which is $20 in this case. The equilibrium quantity is the quantity at which the demand and supply curves intersect, which is 70,000 in this case.

b. Consumer surplus is the area between the demand curve and the equilibrium price, which is ($20 - $10) * (70 - 60)/2 = $50,000. Producer surplus is the area between the supply curve and the equilibrium price, which is ($20 - $10) * (60 - 50)/2 = $50,000.

c. With the subsidy, the new supply curve will shift upwards by $10. Connect the new points to form the new supply curve.

d. The new equilibrium price is the price at which the quantity demanded equals the quantity supplied with the new supply curve, which is $25 in this case. The new equilibrium quantity is the quantity at which the demand and new supply curves intersect, which is 80,000 in this case.

e. The price does not fall by the full amount of the subsidy ($10) because the subsidy only affects the supply side. The consumers still have to pay the equilibrium price, which includes the subsidy.

f. Consumers now pay the equilibrium price of $25 for the new equilibrium quantity of vaccinations, which is 80,000.