Question

3. Market demand for a good is given by QD= 30- 2P and its market supply is given by QS=P - 6.

(a) Determine the market equilibrium quantity (QM) and price (PM) .

(b) If marginal external benefit is 3 at all levels of consumption (i.e. MEB=3), then what is the socially efficient level of production (Q*)?

-Provides some work to justiy your answers.

Answer #1

Answer:

a. market equilibrium quantity (QM) = **6**

and price (PM) = **12**

reason:

Market equilibrium quantity and price are when Qd = Qs

30 - 2P = P - 6; so **P = 12; Q = 6**

b. socially efficient level of production (Q*) =
**8**

reason: Socially efficient output is where MPB + MEB = MC

We need inverse functions for that where we present Price as a
function of quantity.

15 - 0.5Q + 3 = 6+ Q so, **Q = 8; P = 14**

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