Suppose that the government gives a $10 per unit subsidy to sellers of Humbugs. The pre-subsidy price of Humbugs was $50. There are no additional social benefits to encouraging the consumption of Humbugs.
If, at the original equilibrium price, the elasticity of demand was -0.5 and the elasticity of supply was 2, which of the following is true?
a. All benefits from the subsidy will go to consumers.
b. Consumers and producers will split the benefits of the subsidy equally.
c. All benefits from the subsidy will go to producers.
d. Firms will receive relatively more benefits than consumers.
e. Consumers will receive relatively more benefits than firms.
Which of the following statements is correct about the overall effect of the subsidy?
Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.
a. The subsidy will cost the goverment more than the net benefit to consumers and producers.
b. Only producers will be better off.
c. Only the government will be better off.
d. The subsidy will clearly improve welfare for society as a whole.
e. Both consumers and producers will be better off.