Answer to Question #227466 in Microeconomics for aaa

Question

If the government decided to provide the consumer a quantity subsidy of 5 birr on good X and ad valorem subsidy of 12% on consumption of good Y. Compute price elasticity of demand and supply at market equilibrium in A and B. Also comment on the nature of elasticities

Answer 1

With the ad valorem subsidy of 12 % on good Y, the quantity supplied of the good will increase by the same percentage or more. Supply curve will shift to the right and there will be excess demand due to fall in price.

Good Y has elastic demand.

Quantity subsidy of 5 Birr does not significantly cut down the cost of production of good X. There exists infinite changes in price of good X. Good X has inelastic demand.