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Subsidy Benefit & Elasticity DSP(4) – Market Intervention The Relationship Between

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P per-unitsubsidy S1S1S1S1 S2S2S2S2 Q0 P2P2 Q2Q2 P1P1 Q1Q1 D 1.The elasticity of demand is larger than the elasticity of supply 1.The elasticity of demand is larger than the elasticity of supply

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is smaller than Consumers’ subsidy benefit Sellers’ 1.The elasticity of demand is larger than the elasticity of supply 1.The elasticity of demand is larger than the elasticity of supply Pper-unitsubsidy S1S1S1S1 S2S2S2S2 Q0 P2P2 Q2Q2 P1P1 Q1Q1 D

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is larger than Pper-unitsubsidy S1S1S1S1 S2S2S2S2 Q0 P2P2 Q2Q2 P1P1 Q1Q1 D 2.The elasticity of demand is smaller than the elasticity of supply 2.The elasticity of demand is smaller than the elasticity of supply Consumers’ subsidy benefit Sellers’ Pper-unitsubsidy S1S1S1S1 S2S2S2S2 Q0 P2P2 Q2Q2 P1P1 Q1Q1 D

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“The larger the elasticity, the smaller the subsidy benefit, and vice versa.” Under what condition both consumers and sellers would share the SAME amount of subsidy benefit? Under what condition both consumers and sellers would share the SAME amount of subsidy benefit? Pper-unitsubsidy S1S1S1S1 S2S2S2S2 Q0 P2P2 Q2Q2 P1P1 Q1Q1 DPper-unitsubsidy S1S1S1S1 S2S2S2S2 Q0 P2P2 Q2Q2 P1P1 Q1Q1 D

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P1P1 Q2Q2 P 2 = Q1Q1 3. If the demand is perfectly elastic Per-unit subsidy S increases (S curve shifts down) P remains unchanged and Q increases Subsidy Sellers will obtain all subsidy benefit while consumers will obtain nothing. Sellers’ subsidy benefit per-unitsubsidy S1S1S1S1 S2S2S2S2 PQ0 D

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Per-unit subsidy S increases (S curve shifts down) P decreases and Q remains unchanged 4. If the demand is perfectly inelastic SubsidyD P1P1Consumers’ subsidy benefit P2P2 Q1Q1 = Q 2 Consumers will obtain all subsidy benefit while sellers will obtain nothing. PQ0 per-unitsubsidy S1S1S1S1 S2S2S2S2

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Per-unit subsidy S increases (S curve shifts down) P decreases and Q increases 5. If the supply is perfectly elastic per-unitsubsidy Q1Q1 P1P1 Q2Q2 P2P2 SubsidyConsumers’ subsidy benefit PQ0 S1S1S1S1 S2S2S2S2 D Consumers will obtain all subsidy benefit while sellers will obtain nothing.

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Per-unit subsidy S increases (S curve shifts down) both P and Q remain unchanged 6. If the supply is perfectly inelastic per-unitsubsidy Q1Q1 = Q 2 P 2 = Subsidy = S 2 Sellers’ subsidy benefit PQ0 D S1S1S1S1 Sellers will obtain all subsidy benefit while consumers will obtain nothing. P1P1

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