Output Private Marginal External per Hour Marginal Cost Benefit Cost 1 $5.00 $10
ID: 1100489 • Letter: O
Question
Output Private Marginal External
per Hour Marginal Cost Benefit Cost
1 $5.00 $10.00 $ .10
2 5.20 9.25 .20
3 5.45 8.50 .35
4 5.75 7.75 .60
5 6.10 7.00 .90
6 6.50 6.50 1.40
7 7.20 6.00 2.00
8 8.00 5.50 2.80
7. In the table above, if the equilibrium were determined by a free market, it would be
a. 7 units, $9.20
b. 6 units, $6.50
c. 6 units, $7.90
d. 5 units, $7.
e. 4 units, $7.15
8. In the table above, the socially optimal equilibrium would be
a. 6 units, $7.90
b. 7 units, $4
c. 5 units, $7
d. 7 units, $8
e. 6 units, $6.50
Explanation / Answer
Free market Equilibrium is defined as the point where Marginal Private Cost = Marginal Benefit. In the markets buyers only take into private cost when making a decision.
Hence Equilibrium will be 6 units @ $6.50
Socially Optimal Equillibrium is when we take into the accoun the social external costs incurred. Hence Social Marginal Cost = Marginal Private Cost + External Cost
Hence Socially Optimal Equillibrium is 5 units, @ $7.00
Here Social Marginal Cost = $6.10 + $0.90.
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