What is the deadweight loss due to subsidy

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Reference no: EM13199358

Suppose the U.S. supply and demand curves for automobiles cross a price of $15,000 and that (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers $2,000 subsidy to every American who buys a car (regardless whether the car is foreign or domestic).

a. Draw a graph showing the Domestic Demand & supply, World price and price with subsidy.

b. At what prices do U.S. producers sell their cars before and after subsidy is offered? What prices do U.S. consumers feel liked are paying before and after the subsidy is offered? (enter your answers in constructed table below)

c. Before and after the subsidy is offered, calculate the gains to all relevant groups of Americans. What is the deadweight loss due to subsidy? (hint: Draw S & D; world price and price after subsidy and label your areas and enter the letters in the constructed table below, I am not looking for numbers but simply letters).

Reference no: EM13199358

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