Demand in a market is given by QD = 500 - 10P. The marginal cost of production...

Demand in a market is given by Q_D = 500 - 10P. The marginal cost of production is constant and MC = 10. In a competitive industry, that implies that marginal cost is perfectly elastic at a price of P = 10.

1.) What quantity is demanded at a price of P = 10?

2.) What is the marginal private benefit of consumption (measured in dollars per unit of consumption)?

3.) The marginal external benefit (MEB) of consumption, measured in dollars per unit of Q, is given by MEB = 12.5 - 0.025Q. What is the marginal social benefit of consumption, expressed as a function of Q?

4.) What is the efficient quantity of consumption/production in this market?

5.) What is the deadweight loss (measured in dollars) associated with the competitive market equilibrium that you calculated in question 1?

6.) What Pigouvian subsidy (measured in dollars per unit of consumption) would induce the economically efficient outcome?

Expert Solution

Rahul Sunny answered 2 years ago

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