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Question: 5 consider a market in which demand and supply have...

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5. Consider a market in which demand and supply have the following functional forms:

The free-market equilibrium is at P = $24 and Q = 12.

Qd = 24-1/2PB and Qs = -12+PS

a. Graph the free market equilibrium in the space below. Label the curves and show the values of ALL intercepts (show your work to find them).

b. Now suppose that the Government decides to impose a $6 per-unit subsidy in this market. Calculate the price paid by buyers, net price received by sellers, and quantity exchanged once a new equilibrium has been reached after the imposition of the subsidy.

c. In your graph, shade in the change in consumer surplus and the change in producer surplus after the subsidy.

d. Calculate the deadweight loss associated with this subsidy and explain what this deadweight loss represents.

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