Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 5: Q 13 (page 121)

Suppose that the current price of a tablet device is \(300 and that people are buying 1 million devices per year. The government decides to begin subsidizing the purchase of new tablet devices. The government believes that the appropriate price is \)260 per tablet, so the program offers to send people cash for the difference between \(260 and whatever the people pay for each tablet they buy.

(a) If no consumers change their tablet-buying behavior, how much will this program cost the taxpayers?

(b) Will the subsidy cause people to buy more, fewer, or the same number of tablets? Explain.

(c) Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, how much will this program cost the taxpayers?

(d) Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to \)320, how much will this program cost the taxpayers?

Short Answer

Expert verified

(a) The program will cost $ 40 million to the taxpayers.

(b) The subsidy will cause the people to buy more tablets.

(c) The program will cost $ 60 million to the taxpayers.

(d) The program will cost $ 90 million to the taxpayers.

Step by step solution

01

Step 1. Given Information

Current price of tablets = $ 300

The number of tablets bought = 1 million.

The appropriate price according to the government is $260.

02

Part (a). No consumer changes their drive.

The government subsidy at the current market price is,

$(300-260)=$40

If consumers do not change their buying behavior despite subsidy then,

Cost for taxpayers

role="math" localid="1653631296657" =$40×1million=$40million

03

Part (b). Effect of subsidy on drives.

The subsidy will encourage people to buy more tablets as they would have to pay less for the same quantity and people who were earlier unable to pay $300 might be now willing to pay $ 260 for tablet. The lesser price will attract a greater consumer base.

04

Part (c). If the market price of tablets does not change.

When the market price remains the same at $300, the government subsidy is $40 and the consumers willing to buy is 1.5 million. Then,

Cost for taxpayers

=$40×1.5million=$60million

05

Part (d). If the market price changes.

If the market price of tablets rises to $320 as the population of consumers increases to 1.5 million, then the government subsidy will be,

$(320-260)=$60

Then,

Cost for Taxpayers

=$60×1.5million=$90million

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The French government recently allocated the equivalent of more than $120 million in public funds to Quaero (Latin for “I search”), an Internet search engine analogous to Google or Yahoo. Does an Internet search engine satisfy the key characteristics of public good? Why or why not? Based on your answer, is a publicly funded Internet search engine a public good or a government-sponsored good?

A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort and, if successful, receive larger budget allocations in future years. Another rationale for expanding the agency’s activities is that this will make the jobs of its workers more interesting, which may help the government agency attract better-qualified employees. Nevertheless, to broaden its legal mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In addition, to expand its activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. Identify which aspects of this problem are similar to those faced by firms that operate in private markets and which aspects are specific to the public sector.

Draw a diagram of this nation’s market for automobiles, which are a substitute for buses. Explain how the government policy you discussed in part (b) of Problem 5-5 is likely to affect the market price and equilibrium quantity in the country’s auto market. How are auto consumers affected by this policy to attain the spillover benefits of bus transit?

How does the jump in measles cases since 2000 illustrate the positive externality associated with measles vaccinations? Explain briefly.

Now draw a diagram of the market for oranges. Explain how the government policy you discussed in part (b) of Problem 5-2 is likely to affect the market price and equilibrium quantity in the orange market. In what sense do consumers of oranges now “pay” for dealing with the spillover costs of pesticide production?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free