1. Market demand for widgets can be determined by the following equation: Q 1000
ID: 1137244 • Letter: 1
Question
1. Market demand for widgets can be determined by the following equation: Q 1000 2P Thus, for example, if the price is S20, then consumers would want to purchase a total of 960 widgets. Market supply for widgets is determined by this equation: a. b. c. What is the maximum price at which suppliers would not produce any widget? What is the minimum price at which consumers would not buy any widget? What is the equilibrium price and quantity of widgets in this perfectly competitive d. Suppose that a research study is disclosed in which it is shown that the consumption (demand) of widgets generates a positive externality on the society. The study claims that the added social benefit per unit of widget consumed is equivalent to S50. What is the socially efficient quantity of widgets that a regulator in this market would want to achieve as an equilibrium situation? e. What is the potential equilibrium price that would need to be offered so that producers are willing to supply the socially ideal quantity in your previous answer (part c)? f If a regulator wanted to lead the market to that sociall optimal outcome found above. Would she need to impose a tax or offer a subsidy? What should be the magnitude of the required tax or subsidy to achieve the socially optimal equilibrium allocation? g.Explanation / Answer
Qd= 1000-2P
Qs= -1 +4P
a. Maximum Price at which suppliers will not produce any widget i.e. Qs= 0
0= -1 +4P
P= ¼ = 0.25
b. Maximum Price at which consumers will not buy any widget i.e. Qd= 0
0=1000-2P
P= 500
c. Equilibrium Quantity and Price. Put Qs=Qd
1000-2P = -1 +4P
6P= 1001
P = 166.83
Put this P in Q.
Q= 1000-2(166.83)
Q= 666.33
d.Added social benefit per unit of widget = $50
Add this value to Quantity Demanded as more the benefit more will be the Quantity demanded by the consumer.
Qd’ = 1000-2P+50 = 1050-2P
New equilibrium Qd’=Qs
1050-2P = -1 +4P
6P= 1051
P= 175.1
Q= 1050-2(175.1)
Q= 696.66
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