Skip to main content

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.

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