Questions: ASSESS Chapter 4 Homework Text Problem 4-5 Text Problem 4-4 Text Problem 4-3 Text Problem 4-2 Text Problem 4-1 Question The quality of wheat supplied by wheat producers has increased in recent years. The government has been supporting this improvement through a subsidy program for wheat growers. Draw a diagram showing how this government intervention has affected the market for wheat. In your diagram, show and label the following: Thoroughly explain your diagram. What happened to equilibrium price and quantity? How did consumer and producer surplus change? Is there any deadweight loss? If so, show it in your diagram.

To address the question regarding the impact of a government subsidy on the wheat market, we need to analyze how such an intervention affects supply, demand, equilibrium price, and quantity, as well as consumer and producer surplus. Here's a step-by-step explanation along with a description of the diagram you would draw:

1. Axes and Curves:

   • Vertical Axis (Price): Represents the price of wheat.
   • Horizontal Axis (Quantity): Represents the quantity of wheat.
   • Demand Curve (D): Downward sloping, showing the relationship between price and quantity demanded.
   • Original Supply Curve (S1): Upward sloping, showing the relationship between price and quantity supplied before the subsidy.
   • New Supply Curve (S2): Shifts to the right of S1, representing the increased supply due to the subsidy.

2. Equilibrium Points:

   • Original Equilibrium (E1): The intersection of the original supply curve (S1) and the demand curve (D), indicating the original equilibrium price (P1) and quantity (Q1).
   • New Equilibrium (E2): The intersection of the new supply curve (S2) and the demand curve (D), indicating the new equilibrium price (P2) and quantity (Q2).

1. Equilibrium Price and Quantity:

   • Equilibrium Price (P2): Decreases from P1 to P2 due to the rightward shift in the supply curve, as producers are willing to supply more wheat at each price level because of the subsidy.
   • Equilibrium Quantity (Q2): Increases from Q1 to Q2, as the market clears at a higher quantity due to the increased supply.

2. Consumer and Producer Surplus:

   • Consumer Surplus: Increases because consumers are paying a lower price (P2) and consuming a higher quantity (Q2) of wheat. The area under the demand curve and above the price line expands.
   • Producer Surplus: Increases because producers receive a subsidy, which effectively raises the price they receive above the market price (P2). The area above the supply curve and below the price line expands.

3. Deadweight Loss:

   • In the case of a subsidy, there is typically no deadweight loss in the traditional sense (as seen with taxes), but there is a cost to the government for providing the subsidy. This cost is represented by the area between the original and new supply curves over the quantity sold (Q2).

The government subsidy leads to a lower equilibrium price and a higher equilibrium quantity in the wheat market. Both consumer and producer surplus increase, but the government incurs a cost for the subsidy. The diagram effectively illustrates these changes by showing the shift in the supply curve and the resulting changes in equilibrium.