Paper nstructions:

Question 1: (62 Points] Suppose that demand and supply in the market for education can be represented by the following functions: Qd = 200 – 5P; Qs = 10P – 25. a. [3 Points) Find the market equilibrium price P* and quantity Q*. b. [4 Points] Draw demand and supply curves on a graph. Be sure to label the axises correctly. Make sure you label the coordinates of four points in the graph: (1,2) intercepts of demand curve with the both axises, (3) intercept of the supply curve with the Price axis, and (4) the market equilibrium. For the rest of the question, assume that the government subsidizes students (the consumers) $6 for every unit of education. C. [8 Points] Calculate the after-subsidy equilibrium prices (demand price Pd and supply price Ps) and quantity Qsub. d. [3 Points] Draw on the same graph above the following: • Draw a vertical dashed line at Qsub, be sure to label the value of Qsub. • Draw two horizontal dashed lines, at Pd and Ps, respectively, be sure to label the values of prices on the graph. e. [16 Points) Label the areas in your graphs with letters A, B, C, D, …, then: • Use the lettered areas to identify CS, PS, TS before the subsidy. • Use the lettered areas to identify CS, PS, GR, TS, DWL after the subsidy. f. [16 Points) Calculate CS, PS, TS before the subsidy, CS, PS, TS, GR and DWL after the subsidy. g. [4 Points] Calculate consumer incidence and producer incidence.

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