Question on supplier surplus.

CFA Level I Economics
#1

As econs is complicated, I wrote my question on a piece of paper and scanned it.

http://www.freeimagehosting.net/876sb

#2

Notice that producers (suppliers) get price H (new equilibrium price of E + subsidy). That means that compared to the previous equilibrium, they are better off by ABGH.

Similarly, consumers are charged the new equilibrium price E, which means that they are better off by ABED.

The subsidy costs the government HGED, which means that BGE is deadweight loss.

#3

Your graph is a bit complicated - it’s hard for me to tell you the answer based on your drawing.

The CFA forbids me to tell you whats on the exam, but this is what I can tell you:

  1. find all of the past Mock exams (go back several years) have you ever seen a graph in any of them?

  2. go to the CFAI website using the link below, look at the percentage dedicated to economics, if that is the percentage and there are 240 questions on the exam, how many questions will be on economics in comparison to other areas of study?

http://www.cfainstitute.org/cfaprogram/courseofstudy/pages/topic_area_weights.aspx

#4

The first part of this link may help you: http://ingrimayne.com/econ/Efficiency/EfficiencyMark2.html

24 questions is still a significant portion of the test. I think it would be good to understand at least conceptually the effect of a subsidy on total surplus.

#5

Thanks Birdec for the link and thanks too to this thread participants.

I got wrong the question 2 on this excellent demand supply quiz at below link: http://ingrimayne.com/econ/DemandSupply/quiz4ai.htm

Could someone pls help me with the Q2 on this link?

#6

ABGH = Subsidy = Amount Government has to pay

ABC = Supplier Surplus

DEF = Supplier Surplus after subsidy

It’s simple maths here.

ABGH (Subsidy) = DEF (Supplier Surplus after subsidy) - ABC (Supplier Surplus)

Let’s suppose supplier surplus (ABC) is $10 and government pays a subsidy (ABGH) of $5, which means supplier subsidy after subsidy (DEF) will be $15 (Supplier surplus plus Subsidy).

ABC (Supplier Surplus) + Subsidy (ABGH) = DEF (Supplier Surplus after subsidy),

By simple algebra,

Subsidy (ABGH) = DEF (Supplier Surplus after subsidy) - ABC (Supplier Surplus)

Subsidy (ABGH) = 15 – 10

Subsidy (ABGH) = 5