In the absence of taxes, subsidies or other distortions, the market demand and supply for bags of cement would be given by QD = 1500 - 10P and QS = 140P, respectively, where Q is quantity of cement in bags per day, and price (P) is measured in dollars per bag. For some reason, a distortionary subsidy of $2.50 per bag is offered to the competitive firms that supply this market. A proposed project will use 75 bags of cement per day. [For all parts of this question, please show and briefly explain all of your calculations. Be sure to express any numerical answers in the correct units of measure, such as $/day, or $/bag.]
(a) Estimate the total (social) opportunity cost of the 75 bags of cement per day.
(b) Estimate the shadow value or social opportunity cost per bag of cement to be used by the proposed project.
(c) Prepare a diagram that shows the market for cement, with and without the project's cement purchases.
(i) Label the subsidy-inclusive quantity-price pairs, with (E1) and without (E0) the project.
(ii) Shade and label an area that best represents your answer to (a).
(d) Estimate and report (numerically to two decimal places) the size and direction of the change in each of:
(i) Consumers' surplus (only for non-project consumers),
(ii) Producers' surplus,
(iii) Project expenditures on cement, and
(iv) Government subsidy payments to cement sellers.
(e) In a single sentence, relate the answers in part (a) to the four dollar values derived in part (d).