Question

Suppose the demand and the supply for lumber (harvested wood processed in a sawmill) used for construction in Australia are given by

QD =100 – 2P
QS = 2P
Assume also that the market is perfectly competitive.
the government introduces a subsidy of s=5 per unit of lumber transacted in the market. Calculate the new equilibrium quantity and the price paid by consumers and received by producers.

Answer 1

The question involves finding the new market equilibrium after a government subsidy is introduced into a perfectly competitive market for lumber. It requires adjusting the supply equation to account for the subsidy, setting it equal to the demand equation, and solving for the new equilibrium quantity and price, along with distinguishing between the price paid by consumers and received by producers.

Step-by-step explanation:

The question involves applying the concepts of market equilibrium, supply and demand, and government intervention in the form of a subsidy. Initially, we need to find the equilibrium quantity and price without the subsidy by setting the demand equation QD equal to the supply equation QS. With a subsidy of s = $5, the supply equation becomes QS = 2P + 5. After applying the subsidy, we need to recalculate the new equilibrium by setting the modified supply with the unchanged demand.

Step-by-Step Calculation:

1. Set QD = QS to find the initial equilibrium.
3. Integrate the subsidy into the supply equation and solve for the new equilibrium price and quantity.
4. Calculate the price paid by consumers and received by producers considering the subsidy.