Answer to Question #47749 in Microeconomics for Neemaneema

Question

In an effort to encourage production of rose flowers, the Government is contemplating to give a specific subsidy of 11cents per stem to rose flower producers. You are required to evaluate the proposed strategy to determine the effect of the subsidy on:
(a) Equilibrium prices and quantity.
(b) Consumer and producer surplus.
(c) Government expenditure.
(d) Welfare.

Answer 1

In an effort to encourage production of rose flowers, the Government is contemplating to give a specific subsidy of 11cents per stem to rose flower producers. You are required to evaluate the proposed strategy to determine the effect of the subsidy.
(a) Equilibrium quantity will increase, because the supply will increase, so equilibrium quantity will decrease.
(b) Both consumer and producer surplus will increase after increase of supply.
(c) Government expenditure will increase, as it subsidies the producers.
(d) Welfare will increase, as consumer and producer surplus increases and price decreases.