c. A public-interest group supports the subsidy, arguing that it helps
consumers and producers alike. Economists oppose the subsidy,
declaring that it leads to an inefficient level of output. In your
opinion, which side is correct? Explain carefully.- The market for rice in an East Asian country has demand and supply
given by QD 28 4P and QS 12 6P, where quantities denote
millions of bushels per day.
a. If the domestic market is perfectly competitive, find the equilibrium
price and quantity of rice. Compute the triangular areas of consumer
surplus and producer surplus.
b. Now suppose that there are no trade barriers and the world price of rice
is $3. Confirm that the country will import rice. Find QD, QS, and the
level of imports, QDQS. Show that the country is better off than in
part (a), by again computing consumer surplus and producer surplus.
c. The government authority believes strongly in free trade but feels
political pressure to help domestic rice growers. Accordingly, it
decides to provide a $1 per bushel subsidy to domestic growers. Show
that this subsidy induces the same domestic output as in part (a).
Including the cost of the subsidy, is the country better off now than in
part (b)? Explain.
Discussion QuestionOver the last 30 years in the United States, the realprice
of a college education (i.e., after adjusting for inflation) has increased by almost
80 percent. Over the same period, an increasing number of high school grad-
uates have sought a college education. (Nationwide college enrollments almost
doubled over this period.) While faculty salaries have barely kept pace with
inflation, administrative staffing (and expenditures) and capital costs have
increased significantly. In addition, government support to universities (par-
ticularly research funding) has been cut.
a. College enrollments increased at the same time that average tuition rose
dramatically. Does this contradict the law of downward-sloping demand?
Explain briefly.
b. Use supply and demand curves (or shifts therein) to explain the dramatic
rise in the price of a college education.Spreadsheet Problems
S1. In a perfectly competitive market, the cost structure of the typical firm is
given by C 25 Q^2 4Q, and industry demand is given by Q 400
20P. Currently, 24 firms serve the market.
a. Create a spreadsheet (similar to the given example) to model the
short-run and long-run dynamics of this market. (Hint:Enter314 Chapter 7 Perfect Competitionc07PerfectCompetition.qxd 9/29/11 1:30 PM Page 314