Question

1) If MC = 5 + Q and and MWTP = 20 –2 Q What is the consumer and producer surplus in the market equilibrium?

2 ) The marginal net benefits of production are given by marginal willingness to pay minus the marginal costs of production (this is the net benefit from producing one additional unit). The area under the marginal net benefit curve is the sum of producer and consumer surplus. The marginal net benefits are given by MNB = MWTP – MC = 15 – 3Q.

a. Which quantity maximizes the total (not marginal) net benefits of production?

b. What are the maximum total net benefits?

Answer 1

1. MC = 5+ Q

Marginal cost represents the supply curve in the market. When Q=0 , P= 5

MWTP = 20- 2Q

Marginal willingness to pay represents the demand curve in the market.
When Q=0 , P= 20

At th equilibrium Demand equals supply .

5+Q = 20-2Q

3Q = 15

Q = 5 units (Equilibrium quantity)

P = 5+Q

P= 5+5 = $10 (Equilibrium price)

Consumer surplus is the area of triangle above the equilibrium price and below the demand curve = (0.5)(20-10)(5)= $ 25

Producer surplus is the area of triangle above the supply curve and below the equilibrium price = (0.5)(10-5)(5)= $12.5.