Question

In: Economics

Suppose a perfectly competitive market is composed of 100 identical sellers (price-takers). Each individual seller faces...

  1. Suppose a perfectly competitive market is composed of 100 identical sellers (price-takers). Each individual seller faces the following private marginal costs of production:
Quantity 1 2 3 4 5 6 7
Marginal Cost 50 40 60 80 100 120 140

a. If the price of the good is $100, how many units would this firm produce? How many would be produced in the market?

b. If the price of the good is $120, how many units would this firm produce? How many would be produced in the market?

c. If the price of the good is $140, how many units would this firm produce? How many would be produced in the market?

d. Suppose the table below gives the points along the market demand curve for this good.

Price 180 160 140 120 100 80
Quantity Demanded 300 400 500 600 700 800

Given all the information above, what will be the equilibrium price and quantity in this perfectly competitive market?

e. Now suppose that each unit produced by these firms creates waste which negatively affects others in the economy by an amount equal to $40 for each unit produced. If firms in this market considered the social costs of production when deciding output, rather than the private costs, what would be the equilibrium price and quantity?

f. How does this price and quantity compare to the outcome when only private costs were considered?

g. List 2 ways the government could get these firms to consider the social costs of production when deciding their output levels.

  1. Suppose consumer decisions to purchase a product in a market are based solely on the private benefits these consumers expect to receive from the product. These decisions lead to the following market demand curve:
Price 15 14 13 12 11 10 9 8
Quantity Demanded 10 20 30 40 50 60 70 80

The market supply contains the following points:

Price 15 14 13 12 11 10 9 8
Quantity Supplied 70 65 60 55 50 45 40 35

a. What is the equilibrium price and quantity?

b. Now suppose each product purchased by these consumers also creates a positive externality for others of $3. If these consumers were to consider the social benefits of their purchases when deciding to buy, rather than just the private benefits, what would be the new equilibrium price and quantity?

c. How does this new equilibrium compare to the previous equilibrium when only private benefits were considered?

d. List 2 ways the government could get these consumers to consider the social benefits of their purchases when deciding to buy.

Solutions

Expert Solution

Quantity 1 2 3 4 5 6 7
MC 50 40 60 80 100 120 140

a.

In perfectly competitive market: Equilibrium condition for firm is Price=MC.

If price= 100, MC is 100 at Quantity=5

This firm would produce 5 units

There are 100 identical firm each will produce 5 units so:

Units produced in the market= 5 x 100= 500 units

b.

In perfectly competitive market: Equilibrium condition for firm is Price=MC.

If price= 120, MC is 120 at Quantity=6

This firm would produce 6 units

There are 100 identical firm each will produce 6 units so:

Units produced in the market= 6 x 100= 600 units

c.

In perfectly competitive market: Equilibrium condition for firm is Price=MC.

If price= 140, MC is 140 at Quantity=7

This firm would produce 7 units

There are 100 identical firm each will produce 7 units so:

Units produced in the market= 7 x 100= 700 units

d.

Quantity supplied in the market= Each firm's output x 100

Price 180 160 140 120 100 80
Quantity Demanded 300 400 500 600 700 800
Quantity supplied - - 700 600 500 400

Equilibrium arises where Quantity demand= Quantity supplied

Equilibrium price= 120

Equilibrium quantity= 600 units


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