Question

3. (10%) Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to consumers (price set at $0). They argue that such a policy would enhance the health of the citizenry. Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve, determine the resulting output and social welfare from such a policy. Compare welfare under the policy versus the competitive equilibrium. Use a graph to support your answer.

Answer 1