Consider the market for picture frames. a. If the market has a very elastic dema
ID: 1093039 • Letter: C
Question
Consider the market for picture frames.
a. If the market has a very elastic demand curve and inelastic supply curve, how would the application of a subsidy be shared between producers and consumers? Use the tools of consumer surplus and producer surplus to answer this question. Is there a deadweight loss from the subsidy?
b. If instead, the picture frame market were characterized by a very elastic supply curve and an inelastic demand curve, how would the application of a subsidy be shared between producers and consumers.
Explanation / Answer
Firms with inelastic supply or demand curves tend to bear most of the burden of a tax, but they also get most of the benefits of a subsidy, Thereofre the benefits (surplus) of a subsidy would go to the producers in a and the consumers in b.