Question

15. The inverse demand function for bananas is pa=20-9d and the inverse supply function is Ps= 9s, where prices are measured in cents and bananas are measured in pounds. a. If there are no taxes or subsidies, what is the equilibrium quantity? What is the equilibrium market price? (3 marks) b. If a subsidy of 2 cents per pound is paid to banana growers, what is the new equilibrium price and quantity? How much do growers receive per pound? How much do consumers pay per pound? (4 marks) c. Compute the change in the consumer and producer surplus? Show clearly on the graph? Does the subsidy cause a deadweight loss? If so, how large. Explain using a suitable diagram. (5 marks) Express the change in price as a percentage of the original price. If the cross-elasticity of demand between bananas and apples is +0.5, what will happen to the quantity of apples demanded as a consequence of the banana subsidy (assume the price of apples stays constant). State your answer in terms of a percentage change. (4 marks)