The demand and supply functions of a product is given as P = 200- 0.5Q and P = 100+ 0.5Q, respectively. Solve for the equilibrium price and quantity in the product market. If the product has an external benefit of $20, analyse the market and determine the social optimal quantity. Compute the deadweight loss if the market operates at its equilibrium level. Support your answers with a suitable market diagram. What can the government do to restore efficiency in the product market? (b) Consider two consumers of a product, A and B, with an individual demand function QA = 400-5P, and QB = 300 -2.5PB, respectively, where P is the price in dollars and Q is the quantity demanded. (i) Obtain and analyse the marginal social benefit function if the product is a public good. Support your answers with a suitable diagram. (ii) If the marginal cost of producing the public good is $10, compute the optimal quantity of the public good. How will your answer be different if the marginal cost is $30 instead?
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(b) Consider two consumers of a product, A and B, with an individual demand function QA = 400-5P, and QB = 300 -2.5PB, respectively, where P is the price in dollars and Q is the quantity demanded.
(i) Obtain and analyse the marginal social benefit function if the product is a public good. Support your answers with a suitable diagram.
(ii) If the marginal cost of producing the public good is $10, compute the optimal quantity of the public good. How will your answer be different if the marginal cost is $30 instead?
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