Economics:
10th Edition
ISBN: 9781285859460
Author: BOYES, William
Publisher: Cengage Learning
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Chapter 27, Problem 5E
To determine
To explain:
The result of reversing the private cost and
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When does inefficiency exist in an economy?
when a good is distributed fairly among buyers
when a good is not distributed fairly among buyers
when a good is not being produced by the lowest-cost producers
when a good is being consumed by buyers who value it most highly
If a boxing fight is shown on pay-per-view television every Saturday at 4 p.m., the demand curve for each fight is given in the
accompanying graph.
Cost ($/fight)
25
20
15
10
5
0
10 20 30
40 50
Viewing households (millions)
If there is a pay-per-view charge to watch a fight, the outcome is
----because
efficient; prices will allocate the program to those who value it the most
efficient; the marginal cost of an additional viewing household is zero
O inefficient; the marginal cost of an additional viewing household is zero
O inefficient; television stations would not always make a profit
a) Draw a standard S & D graph for a competitive market. It will be the basis for a series of competitive market questions.
b) Below, redraw your graph from (a). Suppose the government decides to subsidize the suppliers by directly giving producers a payment of s for each unit they produce. Add this subsidy to your graph. Highlight/shade the new equilibrium levels of price, quantity, CS, and PS. Shade any inefficiency area.
c) Below, redraw your graph from (a). Now suppose there’s a 2nd source of demand in the form of a foreign demand curve DF. Add DF to your graph below, determine the new total demand curve, determine the new equilibrium, and show how the new equilibrium quantity is divided between domestic and foreign buyers.
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- This question asks you to find the socially optimal outcome. Suppose a social planner takes the demand function and cost functions as given, and can choose (i) the market price, (ii) the number of firms, and (iii) the quantity produced by each firm [the planner is free to choose any quantity, even if the firms would lose money]. The social planner’sgoal is to maximize the sum of consumer surplus and firms’ profits. To do this, the planner will take into account the two economic principles of efficiency, (i) Allocative efficiency which implies price=mc. (2) Efficiency in production, which means that the cost of production of the total market quantity should be minimized. Suppose the demand function is Q(p) = 40 – 5p. For each of the following cost functions, what market price, number of firms and quantity for each firm will the social planner choose?a) C(q) = 20 + 4qb) C(q) = 3 + q^2/3 + 3q.arrow_forwardThis question asks you to find the socially optimal outcome. Suppose a social planner takes the demand function and cost functions as given, and can choose (i) the market price, (ii) the number of firms, and (iii) the quantity produced by each firm [the planner is free to choose any quantity, even if the firms would lose money]. The social planner’sgoal is to maximize the sum of consumer surplus and firms’ profits. To do this, the planner will take into account the two economic principles of efficiency we discussed in class, (i) Allocative efficiency which implies price=mc. (2) Efficiency in production, which means that the cost of production of the total market quantity should be minimized. Suppose the demand function is Q(p) = 40 – 5p. For each of the followingcost functions, what market price, number of firms and quantity for each firm will the social planner choose?a)C(q) = 20 + 4qb) C(q) = 3 + q^2/3 + 3q.arrow_forwardSuppose the government is considering an increase in the toll on a certain stretch of highway from $.20 to $.40. At present, 80,000 cars per week use that highway stretch; after the toll is imposed, it is projected that only 75,000 cars per week will use the highway stretch. Assuming that the marginal cost of highway use is constant (i.e., the supply schedule is horizontal) and equal to $.20 per car, what is the change in social surplus attributable to the increase in the toll? (Hint: The toll increase will cause the supply schedule, not the demand schedule, to shift.) Calculate government revenues from the increased toll. A. $18,750 B. $37,500 C. $15,000 D. $1000arrow_forward
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