Question

Suppose that the current price of a tablet device is \(300 and that people are buying 1 million devices per year. The government decides to begin subsidizing the purchase of new tablet devices. The government believes that the appropriate price is \)260 per tablet, so the program offers to send people cash for the difference between \(260 and whatever the people pay for each tablet they buy.

(a) If no consumers change their tablet-buying behavior, how much will this program cost the taxpayers?

(b) Will the subsidy cause people to buy more, fewer, or the same number of tablets? Explain.

(c) Suppose that people end up buying 1.5 million tablets once the program is in place. If the market price of tablets does not change, how much will this program cost the taxpayers?

(d) Under the assumption that the program causes people to buy 1.5 million tablets and also causes the market price of tablets to rise to \)320, how much will this program cost the taxpayers?

Short answer

(a) The program will cost $ 40 million to the taxpayers.

(b) The subsidy will cause the people to buy more tablets.

(c) The program will cost $ 60 million to the taxpayers.

(d) The program will cost $ 90 million to the taxpayers.

Step-by-step solution

Step 1. Given Information

Current price of tablets = $ 300

The number of tablets bought = 1 million.

The appropriate price according to the government is $260.

Part (a). No consumer changes their drive.

The government subsidy at the current market price is,

$$\begin{gathered} \$(300-260) \\ =\$40 \end{gathered}$$

If consumers do not change their buying behavior despite subsidy then,

Cost for taxpayers

role="math" localid="1653631296657" $$\begin{gathered} =\$40\times 1million \\ =\$40million \end{gathered}$$

Part (b). Effect of subsidy on drives.

The subsidy will encourage people to buy more tablets as they would have to pay less for the same quantity and people who were earlier unable to pay $300 might be now willing to pay $ 260 for tablet. The lesser price will attract a greater consumer base.

Part (c). If the market price of tablets does not change.

When the market price remains the same at $300, the government subsidy is $40 and the consumers willing to buy is 1.5 million. Then,

Cost for taxpayers

$$\begin{gathered} =\$40\times 1.5million \\ =\$60million \end{gathered}$$

Part (d). If the market price changes.

If the market price of tablets rises to $320 as the population of consumers increases to 1.5 million, then the government subsidy will be,

$$\begin{gathered} \$(320-260) \\ =\$60 \end{gathered}$$

Then,

Cost for Taxpayers

$$\begin{gathered} =\$60\times 1.5million \\ =\$90million \end{gathered}$$