The demand and supply of ethanol are given by Q D = 8,000 – 2,000 P and Q S = 1,

Question

The demand and supply of ethanol are given by QD = 8,000 – 2,000P and QS = 1,000P – 1,000, where Pis price per gallon and Q measures gallons per minute. If the government subsidizes ethanol at $0.30 per gallon, what is the deadweight loss?

what do you do exactly with .30- how do you find the subsidy?

A) $30

B) $7,800

C) $119

D)$440

The demand and supply of ethanol are given by QD = 8,000 – 2,000P and QS = 1,000P – 1,000, where Pis price per gallon and Q measures gallons per minute. If the government subsidizes ethanol at $0.30 per gallon, what is the deadweight loss?

what do you do exactly with .30- how do you find the subsidy?

A) $30

B) $7,800

C) $119

D)$440

Explanation / Answer

Answer: a) Deadweight loss= $30

Given the demand and supply of ethanol, equilibrium price = $3 and equilibrium quantity = 2000 gallons per minute.

If the government subsidizes ethanol at $0.30 per gallon, the supply curve shifts downwards by the amount of the subsidy. This results in fall in the price of ethanol from $3 to $ 2.9 per gallon, and quantity increases to 2200 gallons.

Thus, Deadweight loss = 1/2 (200) (0.30) = $30

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