Solved:
Answered by AI, Verified by Human Experts
The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market.
The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market.Equilibrium price ___.
Equilibrium quantity ___.
Final answer:Reducing or removing the subsidy for ethanol would cause the supply curve to shift upwards, leading to an increase in the equilibrium price and a decrease in the equilibrium quantity of ethanol.Explanation:The question involves understanding the effect of government subsidies on the market for ethanol production. A subsidy reduces a producer's costs, allowing them to supply more at every price level, which is shown by a downward shift in the supply curve. If the U.S. government reduces or removes the subsidy for ethanol, the supply curve will shift upwards, indicating a higher cost of production per unit and thus less being supplied at each price point. As a result, the equilibrium price of ethanol would increase and the equilibrium quantity would decrease. This is because, without the subsidy, producers would need to charge more to cover their costs, and at higher prices, consumers would purchase less ethanol, leading to a new equilibrium at a higher price and lower quantity....