Suppose in a Perfect Competitive market the demand function is p=120−q and the supply function is p=40+q. Calculate total welfare.

Expert Solution

Demand function, p = 120 - q or q = 120 - p

and supply function, p = 40 + q or q = -40 + p

At equilibrium,

Demand = Supply

=> 120 - p = -40 + p

=> p = $80 and thus, q = 40 units

Total welfare = 0.5*(p when demand = 0) - p*(p when supply is zero)*q = 0.5*(120 - 40)*40 = $1600

Thus, total welfare is $1600

Rahul Sunny answered 2 years ago

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