Question
Suppose that the individual demand functions for a particular good are Q d i = 20? 1 2 P for 6 people. Assume that these
Suppose that the individual demand functions for a particular good are Q d i = 20? 1 2 P for 6 people. Assume that these 6 people make up the entire market and act as price-takers. The marginal cost of producing the good is constant at MC = $5.
(a) If the good described above is delicious ice cream sundaes, what is the Pareto efficient price and quantity in this market? Be sure to sketch a graph of the individual and market demand curves as part of your answer.
(b) If the good is instead fireworks, then what is the Pareto efficient quantity in this market? Be sure to sketch a graph of the individual demand and Social Marginal Benefit (SMB) curves as part of your answer.
(c) Which is smaller - average per person spending on ice cream sundaes, based on your answer from (a), or on fireworks, based on your answer from (b)? Explain your answer.
(d) If, instead, there are 60 people with the same demand function, recompute the answers for (a)-(c). Why does per person spending in (c) change for fireworks but not ice cream?
(e) Briefly discuss how the private market equilibrium for fireworks is likely to differ from the Pareto optimum that you calculated in (b).
(f) Practice problem 1: Suppose instead that the individual demand functions for a particular good are Q d i = 30?4P for 4 people and Q d i = 20?P for 3 people. Assume that these 7 people make up the entire market and act as price-takers. The marginal cost of producing the good is constant at MC = $5. Recompute the answers for (a)-(c). Hint: Watch out for kinks in the curves!
(g) Practice problem 2: recompute the answers to (a)-(c) given the setup in (f) if MC = $12
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