N6

Consider a well-functioning market for prosthetic hips, that is characterized by the following demand and supply curves: : = 100 2 : = 3

(a) What is the marginal private benefit of the 5th unit?

(b) What assumption was necessary for you to answer (a) (in addition to the assumptions necessary to have a well-functioning market)? Explain.

(c) What is the total social benefit in equilibrium?

(d) What is the net (total) social benefit in equilibrium?

(e) Suppose that one of the by-products from the production of prosthetic hips is a highly hazardous substance that can cause environmental damage when disposed of. How does this affect your answer in (d)? Illustrate using a graph (no need for numbers).