1. [20] Consider a perfectly competitive market where the market demand and
supply are given by
QD
= 550-50P and QS = 62.5P – 12.5
(a) [6] Calculate the equilibrium price and quantity.
(b) [6] Compute the consumer, producer, and total surplus for this market.
(c) [8] Suppose all the firms in the market have identical cost functions and
now the government gives producers a subsidy of $2 per unit of output
sold. Draw the effect on the demand and supply curves, with quantity on
the horizontal axis and the price on the vertical axis. Compute the new
equilibrium price and quantity, the consumer and producer surplus, and
the government expenditure on the subsidy. Comparing the government
expenditure with the sum of the change in consumer surplus and producer
surplus,explain your findings.