Calculate the supply and demand elasticities

Reference no: EM13188309

Consider that the U.S. supply of ethanol follows the function S(p) = 5p, and that the US demand for ethanol is D(p) = 13.5 - 2.5p. Without any government role, there are in equilibrium 9 Billion gallons/year transacted at a price of $1.80/gallon.

a. Calculate the supply and demand elasticities at this market equilibrium point.

Now consider that the government is going to provide a subsidy of $0.60/gallon in order to stimulate this market. In other words, the government will provide funds that allow the price paid by customers to be 60 cents/gallon lower than the price earned by suppliers.

b. Using supply and demand curves, draw the equilibrium points before and after the provision of the 60 cent/gallon subsidy.

c. Calculate the new price earned by sellers, the price paid by customers, and the equilibrium quantity sold in the market (again with the 60 cent/gallon subsidy).

Reference no: EM13188309

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