AP Microeconomics 2.8: Government Intervention

Analyze how price and quantity controls, taxes, and subsidies change incentives, market outcomes, government finances, and allocative efficiency.

[Maximum number: 3]

Deskward is a typical profit-maximizing firm that produces and sells wooden desks in a

constant-cost, perfectly competitive market that is in long-run equilibrium.

(a)

Suppose the government is considering granting a per-unit subsidy to producers of wooden

desks. On your market graph in part A, show the short-run effect of a per-unit subsidy on

each of the following.

[ 2 ]

(i)

The new market equilibrium price and quantity of wooden desks, labeled P* and Q*,

respectively

[ 1 ]

(ii)

The area representing the total cost of the subsidy to the government, shaded completely

[ 1 ]

(b)

Instead of the per-unit subsidy, suppose the government imposes a binding price floor in the

market for wooden desks. Will the price floor result in a shortage of wooden desks, a surplus

of wooden desks, or neither? Explain.

[ 1 ]

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POL-1.A—a. Define forms of government price and quantity intervention. b. Explain (using graphs where appropriate) how government policies… question 1