Five Minute Exercises > Effect of a Subsidy on New Buyers

Problem

Given:

The initial market equilibrium is not subsidized and has Q=400
The elasticity of demand is -2.0
The supply is perfectly elastic at W2A=100
A $25 subsidy is being considered for the good.

Determine:

The new CS generated on the additional units that would be sold if the subsidy were in effect.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 09/28/2010