ib-economics-quantitative

The original producer surplus was the triangle 4,1,Y. So it is the area of that,which is ½ x $3 x 1200 = $1,800. The new producer surplus is the triangle4.25,1,X. So it is the area of that, which is ½ x $3.25 x 1300 = $2,112.5.The increase in producer surplus is $2,112.5 - $1,800 = $312.5.[Out of interest, community surplus, which is consumer surplus + producer surplus,goes from $5,400 to $6,337.50. This is an increase of $937.50. The cost of thesubsidy to the government is $975 (see above). So, it follows that the subsidycreated a dead-weight loss of $975 - $937.50 = $37.50. This occurs because theextra hundred units produced because of the subsidy would not have been producedin a free market.The dead-weight loss is indicated by the triangle XYZ, and so it can also becalculated by finding the area of that triangle, which is ½ x $.75 x 100 = $37.5.]Now you have a go!Question 3.3In the market for baby milk, the demand function is Q D = 900 – 100P and the supply functionis Q S = 200P, where price is given in $ per carton and quantity is given in thousands ofcartons per month. The government then grants a subsidy of $1.50 per carton, to make themilk cheaper for parents.i. On the graph below, draw the original demand and supply curves and indicateequilibrium.Produced by Ian Dorton & Jocelyn Blink Page 24