Answers to Selected Questions in Chapter 17

# Answers to Selected Questions in Chapter 17 - up good X by...

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Answers to Selected Questions in Chapter 17 4 In this case, efficient production occurs when price equals short run marginal cost. Thus efficient output is Q = 40, because P = 50 – Q = 10 = marginal cost. If government produces only 30 units, the marginal demand (willingness to pay) price is \$20. This exceeds SRMC. Government is under-producing by 10 units. 5 (i) Under the mark-up strategy, price will be \$12. Output will = demand = 19 units. (ii) If efficient price is SRMC pricing, P = 10 = 50 – 2Q, and Q = 20. (iii) If demand curve is linear, deadweight loss = 0.5 P Q = 0.5 × 2 × 1 = 1. (iv) If demand is more inelastic, deadweight loss will be smaller. 8 To achieve a surplus of \$100 over SRMC and minimise DWL, the agency should mark
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Unformatted text preview: up good X by 25% from \$10 to \$12.5 and sell 16 units and mark up Y by 12.5% and sell 22.5 units. Consumption of both goods falls by 25 per cent. At these prices and quantities, selling X results in surplus of \$40 and selling Y in a surplus of about \$60. DWL from producing X = 0.5 × 2.5 × 4 = 5.0 and DWL from producing Y = 0.5 × 2.25 × 7.25 = 8.2. The total DWL =13.2. DWL would be higher if the agency used other mark-ups to obtained surplus of \$100. To obtain \$100 surplus from X alone, it would have to double price of X to \$20 and sell only 10 units, with a DWL = \$50. If agency obtained \$100 surplus from Y alone, it would increase price of Y to about \$25.5 and sell only about 18 units, with DWL = about \$34....
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## This note was uploaded on 12/02/2009 for the course ECOS a taught by Professor A during the Three '09 term at University of Sydney.

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