Question

1. Suppose a perfectly competitive market is composed of 100 identical sellers (price-takers). Each individual seller faces the following private marginal costs of production:

Quantity	1	2	3	4	5	6	7
Marginal Cost	50	40	60	80	100	120	140

a. If the price of the good is $100, how many units would this firm produce? How many would be produced in the market?

b. If the price of the good is $120, how many units would this firm produce? How many would be produced in the market?

c. If the price of the good is $140, how many units would this firm produce? How many would be produced in the market?

d. Suppose the table below gives the points along the market demand curve for this good.

Price	180	160	140	120	100	80
Quantity Demanded	300	400	500	600	700	800

Given all the information above, what will be the equilibrium price and quantity in this perfectly competitive market?

e. Now suppose that each unit produced by these firms creates waste which negatively affects others in the economy by an amount equal to $40 for each unit produced. If firms in this market considered the social costs of production when deciding output, rather than the private costs, what would be the equilibrium price and quantity?

f. How does this price and quantity compare to the outcome when only private costs were considered?

g. List 2 ways the government could get these firms to consider the social costs of production when deciding their output levels.

2. Suppose consumer decisions to purchase a product in a market are based solely on the private benefits these consumers expect to receive from the product. These decisions lead to the following market demand curve:

Price	15	14	13	12	11	10	9	8
Quantity Demanded	10	20	30	40	50	60	70	80

The market supply contains the following points:

Price	15	14	13	12	11	10	9	8
Quantity Supplied	70	65	60	55	50	45	40	35

a. What is the equilibrium price and quantity?

b. Now suppose each product purchased by these consumers also creates a positive externality for others of $3. If these consumers were to consider the social benefits of their purchases when deciding to buy, rather than just the private benefits, what would be the new equilibrium price and quantity?

c. How does this new equilibrium compare to the previous equilibrium when only private benefits were considered?

d. List 2 ways the government could get these consumers to consider the social benefits of their purchases when deciding to buy.

Answer 1

Quantity	1	2	3	4	5	6	7
MC	50	40	60	80	100	120	140

a.

In perfectly competitive market: Equilibrium condition for firm is Price=MC.

If price= 100, MC is 100 at Quantity=5

This firm would produce 5 units

There are 100 identical firm each will produce 5 units so:

Units produced in the market= 5 x 100= 500 units

b.

In perfectly competitive market: Equilibrium condition for firm is Price=MC.

If price= 120, MC is 120 at Quantity=6

This firm would produce 6 units

There are 100 identical firm each will produce 6 units so:

Units produced in the market= 6 x 100= 600 units

c.

In perfectly competitive market: Equilibrium condition for firm is Price=MC.

If price= 140, MC is 140 at Quantity=7

This firm would produce 7 units

There are 100 identical firm each will produce 7 units so:

Units produced in the market= 7 x 100= 700 units

d.

Quantity supplied in the market= Each firm's output x 100

Price	180	160	140	120	100	80
Quantity Demanded	300	400	500	600	700	800
Quantity supplied	-	-	700	600	500	400

Equilibrium arises where Quantity demand= Quantity supplied

Equilibrium price= 120

Equilibrium quantity= 600 units