Question
Demand in a market is given by Q D = 500 - 10P.The marginal cost of production is constant and MC = 10. In a
Demand in a market is given by QD= 500 - 10P.The marginal cost of production is constant and MC = 10. In a competitive industry, that implies that marginal cost is perfectly elastic at a price of P = 10.
1.) What quantity is demanded at a price of P = 10?
2.) What is the marginal private benefit of consumption (measured in dollars per unit of consumption)?
3.) The marginal external benefit (MEB) of consumption, measured in dollars per unit of Q, is given by MEB = 12.5 - 0.025Q. What is the marginal social benefit of consumption, expressed as a function of Q?
4.) What is the efficient quantity of consumption/production in this market?
5.) What is the deadweight loss (measured in dollars) associated with the competitive market equilibrium that you calculated in question 1?
6.) What Pigouvian subsidy (measured in dollars per unit of consumption) would induce the economically efficient outcome?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started