## Calculating effect of a subsidy - example

Assume a linear demand function of the form:

**Qd = 120 - 5P**

and a linear supply curve of the form:

**Qs = -30 + 10P**

Using these demand and supply functions, answer the following questions. Once you have had a go at the questions, follow the link below to compare your answers.

- Calculate the quantities demanded and supplied for prices from $3 - $15.
- Plot these figures to give the demand and supply curves for the product.
- Using simultaneous equations, calculate the equilibrium price and output.
- If the government gives a subsidy per unit of $3, plot the new supply curve on the original supply and demand diagram.
- Use the diagram to find out the new equilibrium price and quantity.
- Calculate the amount spent by the government on the subsidy.
- Calculate the revenue received by the firms:
- before the subsidy
- after the subsidy

- Calculate consumer expenditure:
- before the subsidy
- after the subsidy