Suppose that the aggregate demand for fresh thanksgiving turkeys in Calgary is Q

ID: 2505979 • Letter: S

Question

Suppose that the aggregate demand for fresh thanksgiving turkeys in Calgary is Q=72-P,

where Q the number of thousands of turkeys, and P is the price per turkey. Assume there are

a number of turkey farms which supply the Calgary market, and that the aggregate supply

curve (Marginal cost curve) is P= Q/5. Make sure you use a diagram to answer question a),

b) and c) below.

a) (2 points) What is the competitive market equilibrium price? What quantity of

turkeys will be exchanged?

b) (3 points) Now suppose that there are external costs (damages) associated with

turkey production. One thousand turkeys produce one tonne of manure that pollutes

the ground water. If these marginal damages are included as part of the cost of

supplying turkeys, the aggregate supply curve becomes P =Q/2. What are the

socially optimal levels of turkey production and manure? What is the socially

optimal price? How do the market price, and quantity of turkeys and manure, in a),

compare with their socially optimal levels?

c) (4 points) How much would the net social value of turkey production increase if turkey

production were reduced from the competitive market equilibrium to the socially optimal

level?

a) competitive market equilibrium price when AD is equal to AS = 12

Quantity=60

b) In presence of externalities, competitive market equilibrium price=14

Quantity=28

In presence of externalities, the externality adds as a cost and it raises price and reduces output at the same time.

c) When production is reduced from 60 to 28, increase in net social value of turkey production=44-12=32

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