assignment homework

1a. Suppose the marginal cost of a television set is $100. This is constant and equal to the average cost

of television sets. The annual demand for television sets is given by the following equation: Q= 200,000-

500P, where Q is the quantity sold per year and P is the price of the television sets. Is the television sets

are sold in a perfectly competitive market, calculate the annual number sold. Under what circumstances

will the market equilibrium be efficient?

1b. Show the losses in well-being each year that would result from a law limiting sales of television sets

to 100,000 per year. Show the effect on the price, marginal social benefit, and marginal social cost of

television sets. Show the net loss in well-being that will result from a complete ban on the sales of

television sets.

2. A prominent senator has calculated the total social benefit of the current amount of space

exploration at $3 billion per year. The total social cost of space exploration is currently only $2 billion.

The senator argues that a net gain to society would result by increasing the amount of space exploration

until social costs rise enough to equal total benefits. Is the senator’s logic correct?

3. The market equilibrium price for rice in Japan would be $3 per pound in the absence of government

subsidies to rice production. However, the government sets the price of rice at $5 per pound and agrees

to buy all the rice produced by farmers at that price. Assume that points on the demand curve for rice

equal the marginal social benefit of alternative quantities, while points on an upward-sloping supply

curve equal the marginal cost of various quantities. Show how the subsidy program will result in loss in

efficiency.

 
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