ib-economics-quantitative

Q S = - 400 + (400xP) + (400 x 0.75)Q S = - 400 + 400P + 300Q S = 100 + 400PStep 3Identify the effects that are requested by the question in terms of price, quantity, consumerexpenditure, producer revenue, government revenue, consumer surplus or producer surplus.E.g.In the diagram above, the new equilibrium price is $3.50 and the new quantitydemanded is 1300 units.Consumer expenditure goes from 1200 units at $4 = $4,800, to 1300 units at $3.50 =$4,550 – a decrease of $250.Producer revenue, after receiving the subsidy of $0.75 per unit, goes from 1200 unitsat $4 = $4,800 to 1300 units at $4.25 = $5,525 – an increase of $725.Government cost of the subsidy is 1300 units at a subsidy per unit of $0.75 = $975.The gains of consumer surplus and producer surplus can be identified from thediagram and then calculated.The original consumer surplus was the triangle 4,10,Y. So it is the area of that,which is ½ x $6 x 1200 = $3,600. The new consumer surplus is the triangle3.50,10,Z. So it is the area of that, which is ½ x $6.50 x 1300 = $4,225.The increase in consumer surplus is $4,225 - $3,600 = $625.Produced by Ian Dorton & Jocelyn Blink Page 23