Tutorial 3 Q2)

Suppose the private and social marginal benefit for a good are the same and are given by 7-q, where q is the quantity consumed. Suppose also that the private marginal cost in the industry is given by q+1, but also each unit of output creates an external cost of 2.

SMC: p=q+3 PMC: p=q+1

8
7 6 5 4 3 2 1 0 0 1 2 3

Price, p

MR: p=7-2q
4 5 6

D: p=7-q
7

Quantity, q

Done by: Isaac Kirk Tan Mingke, Shen Bowen & Wong Xianyang

Tutorial 3 Q2a)
What is the socially efficient level of output?
8 7 6 5 4 3 2 1 0 0 1 2 3

SMC: p=q+3 PMC: p=q+1

Both the producers and external costs must be considered. Solve the intercept of D and SMC

Price, p

7 q* = q* + 3 q* = 2

MR: p=7-2q
4 5 6

D: p=7-q
7

Quantity, q

Tutorial 3 Q2b)
What is the quantity supplied by a price taking firm?
8 7 6 5 4 3 2 1 0 0 1 2 3

SMC: p=q+3 PMC: p=q+1

A price-taking firm would only take his marginal costs into consideration Solve the intercept of D and PMC

DWL

Price, p

7 q0 = q0 + 1 q0 = 3
In this scenario, the price-taking firm produces more than the socially optimum amount and a DWL arises.

MR: p=7-2q
4 5 6

D: p=7-q
7

Quantity, q

Tutorial 3 Q2c)
What is the deadweight loss that would result if the good were produced by a monopolist that equalises marginal revenue and marginal costs?
8 7 6 5 4 3 2 1 0 0 1 2 3

SMC: p=q+3 PMC: p=q+1

Solve the intercept of MR and PMC 7 2qm = qm + 1 qm = 2

In this scenario, the monopolist produces the same quantity as the socially efficient level of output thus there is no DWL.
MR: p=7-2q
4 5 6

Price, p

D: p=7-q
7

Quantity, q