Question 3 (81) lb) Suppose the supply and demand functions of a good is given by P = 80 + 0.2Qand P = 300 0.2Q,
Question 3 (81) lb) Suppose the supply and demand functions of a good is given by P = 80 + 0.2Qand P = 300 0.2Q, where P is the price in dollars and Q is the quantity. It is discovered that the production of this good imposes $20 of cost per unit to external parties. Analyse the efficiency in the market, compute the market equilibrium quantity and the social optimal quantity and the deadweight loss (if any). Support your answers with a suitable market diagram. Discuss one(1) method which can rectify the issue in the market. (9 marks). Consider 2 consumers A and B of a product with individual demand functions QA = 400 - EPA and QB = 300 2P B, respectively. (i) If the product is a private good, analyse the market and solve for the optimal quantity if the marginal cost is 510. How will your answer be different if the marginal cost is $90? (8 marks) (ii) If the product is a public good, analyse the market and solve for the optimal quantity if the marginal cost is $10. How will your answer be different if the marginal cost is $90? (8 marks)
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