Work It Out

Chapter 6

TABLE OF CONTENTS

Question 1 of 6

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

Consider the following supply and demand diagram. In this market, the government subsidizes the production of this good, and the subsidy wedge is indicated.

Without the subsidy, which area(s) represent(s) the total gains from trade?

A + B

A + B + C + E + F+ G + H

A + B + G + H

G + H

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After the subsidy, which area(s) represent(s) consumer surplus?

B + C + G + H

A + B + C + D + E + F + G + H

G + F + E

A + B + G + F + E

After the subsidy, which area(s) represent(s) producer surplus?

A + B + G + F + E

A + B + C + D + E + F + G + H

B + C + G + H

B + C

After the subsidy, which area(s) represent(s) total government spending on this subsidy?

B + C + D + E + F + G

A + B + C + D + E + F + G + H

B + C + G + H

A + B + G + H

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The area(s) in Questions 2 through 4 that were answers to more than one of the questions were . (If the answer is areas A and B, enter A+B; if areas A, B and C, enter A+B+C, and so on, in alphabetical order.)

Correct! Areas E+F+G show up in Question 2 as additional consumer surplus from the subsidy, and Areas B+C show up as additional producer surplus from the subsidy. These areas are also part of the total government spending on the subsidy from part d. To review how to determine the gains from trade, please see the section “A Commodity Tax Raises Revenue and Creates a Deadweight Loss (Reduces the Gains from Trade).”

Sorry! Which of the areas in Questions 2 and 3 show up in Question 4? To review how to determine the gains from trade, please see the section “A Commodity Tax Raises Revenue and Creates a Deadweight Loss (Reduces the Gains from Trade).”

Now that you have identified the areas from Questions 2, 3, and 4 that showed up again in the answers to more than one of the questions, which of the following best explains why this happens?

The government subsidy creates gains for both buyers and sellers, and does not create a dead weight loss.

The government subsidy creates gains for both buyers and sellers,but creates a dead weight loss.

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Question 1 of 6

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