Consider again the avocado example in the textbook, where demand and supply functions are Qd = 160 – 40p Qs = 50 + 15p Suppose a severe drought hit California, and the state government decided to subsidize farmers 40 cents for each pound of avocados produced. (Unit: Q is million pounds of avocados, and p is dollars).
(1) With government subsidy, write down the functions of demand and supply.
(2) What is the new equilibrium price and quantity of avocados?
(3) Plot the demand and supply curves in the same graph. Label your horizontal and vertical axis properly (you can graph in either (Q, p) or (p, Q) space). Indicate the end points of each curve on each axis. Indicate the change of direction for any curve when there is government subsidy (note: the change of direction depends on whether you graph in (Q, p) or (p, Q) space).
(4) What is the price that farmers receive, and the price that consumers pay for each pound of avocados?
(5) How much in total does the state government have to subsidize the farmers?