2Suppose a farmer owns 100 acres of land and can plant wheat with revenue of $10

Question

2Suppose a farmer owns 100 acres of land and can plant wheat with revenue of $10/acre or cotton with revenue of $20/acre. There are no other production costs. What is the opportunity cost associated with planting one acre of cotton.

II. Perfect competition and economic efficiency. The market demand curve for widgets is P = 30 – Q while the market supply curve is P = Q.

3. What is the equilibrium price and quantity in the widget market under perfect competition? 4. What is the economically efficient level of widget production in this economy?

5. Calculate WTP, total cost, and social net benefits at the economically efficient level of widget production.

6. Calculate consumer and producer surplus at the efficient level of widget production. (Note that these concepts are ultimately useful in identifying the distributional consequences of public policy, although we are not explicitly doing that here.)

7. What is the relation between your estimate of social net benefits in Q3 and consumer and producer surplus in Q4?

Explanation / Answer

Q2. The opportunity cost of anything is the next best alternative that is given up for it.

In other words, the opportunity cost of a good or service is the value of next best alternative good or service that is given up for it.

In the given case, on given piece of land either wheat or cotton can be planted.

If wheat is planted then next best alternative given up is cotton and vice-versa.

Revenue from wheat is $10/acre and revenue from cotton is $20/acre.

Thus, opportunity cost associated with planting one acre of cotton is revenue of $10/acre foregone due to non-plantation of one acre of wheat.

Q3. Market demand curve for widgets is P = 30 - Q while market supply curve of widgets is P = Q.

Under perfect competition, market is in equilibrium when market demand is equal to market supply.

So, equating market demand and market supply.

30 - Q = Q

2Q = 30

Q = 15

Thus, the equilibrium quantity in widget market under perfect competition is 15 units.

Calculate equilibrium price

P = 30 - Q = 30 - 15 = 15

Thus, equilibrium price is widget market under perfect competition is $15/widget.

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