a) If the government imposes a $20 floor price for this good or service, would a surplus or deficit situation ensue on this market? If yes, what is the dollar value of this surplus or deficit?
b) If the government substitutes a $2 subsidy for the $20 floor price in b), explain how that would affect the demand and/or supply and determine the new equilibrium price and quantity.
a)A surplus would ensue since the quantity supplied will exceed quantity demanded.
Let "\\$x" be the dollar value before the surplus; after the surplus, the dollar will have a value of
"\\$(x+20)"
b)Because of the "\\$2" subsidy, the demand will increase since consumers are able to consume more at a lower price. There will be an increase in supply too since producers are able to sell more at a higher price.
Let the original price P ;
After the subsidy, the equilibrium price will become "\\$(P+2)"
Let original quantity be Q. After the subsidy, the quantity will increase by say x.
Hence the equilibrium quantity will be; "(Q+x)" units
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