1a. Assume that the demand for Valium on the part of members of the cast of \"Co
ID: 2429442 • Letter: 1
Question
1a. Assume that the demand for Valium on the part of members of the cast of "Community" is given by Q = 1000 ? 100P, which can also be written as P = 10 – Q/100, where Q is tablets/week and P is $/tablet. If Valium is supplied by a perfectly competitive market at constant price of $2, you predict that ________ tablets will be consumed by the cast. The marginal willingness to pay of the last tablet is $_______. Total expenditure is $_________, and consumer surplus of the cast is __________. (Show your work.)
1b. Alternatively, assume that a "Hollywood Sedatives" is a firm which has the exclusive right to supply Valium to the cast. If this firm produces at marginal cost = average cost = $2, you predict that this firm will sell ________ tablets for $_______/tablet to the cast. Monopoly output generates an economic profit of $__________ for this firm but a welfare loss of ___________ for the market. (Show your work.)
Explanation / Answer
a)
P = 10 - Q/100
MC = 2
Equilibrium; P = MC
10 -Q/100 = 2
Q = 800
P = 2
800 tablets will be consumed
Marginal williness to pay = $ 2
Total Expenditure = 800 *2
= $ 1600
Consumer surplus = 0 .5 (800)(8)
= 6400*.5
= 3,200
b)
TR = 10Q - Q^2
MR = 10 - (1/50)Q
Equilibrium;
MR = MC
10 - (1/50)Q = 2
Q = 400
Firm will sell 400 units.
Price of tablet P = 10 - Q/100
= 10 - 400/100
= $ 6
Economic profit = TR - TC
= 400 *6 - 400*2
= 2400 - 800
= $ 1600
Welfare loss or deadweight loss = 0 .5 ( 6-2) (800 - 400)
= 0.5 (4)(400)
= 0.5*1600
= 800
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