1 10 points Consider a market in which the demand and supply

1. (10 points) Consider a market in which the demand and supply curves are: QD = 1000-P/2 Qs=-500 +2P a) Calculate economic welfare with free trade with the rest of the world and world price of $1000/unit and a tax on consumers of $100/unit. b) Calculate economic welfare with free trade with the rest of the world and world price of S1000uni and a subsidy to producers of S100/unit.

Solution

Ans a)

Tax will increase the Price to 1100

Qd=1000-(1100)/2=450

CS=1/2(2000-1100)(450)=202500

and Qs=1700

PS=1/2(1100-1000)(1700)=85000

Welfare=202500+85000=$287500

Ans b)

When Subsidy provided then effective price is $900

Qd=1000-(900)/2=550

CS=1/2(2000-900)(550)=302500

and Qs=1300

PS=1/2(900-1000)(1300)=-65000

Welfare=302500-65000=$237500