Consider a market in which consumption of the good being traded generates a positive externality.
There are 100 identical consumers, each with a utility function given by (1/2)*(q^(1/2))+m +(G^(1/2)) where G denotes the total level of consumption in the market.
The good is sold by competitive firms that produce with a constant marginal cost of 1 $/unit.
QUESTION: What is the difference between the optimal level of total consumption minus the amount of total consumption generated by the market?
Consider the same setting as in QUESTION 6, but now assume that the good is sold by a monopolist that produces using the same technology.
QUESTION: In this case, what is the difference between the optimal level of total consumption and the level of total consumption in equilibrium?
QUESTION: In this case, what is the difference between the optimal level of total consumption and the level of total consumption in equilibrium?
Nothing?I need a clue in this one!
2750? right or wrong?
right for Q6!!!!!!!thankssssss
And for q7??It's my last chance...
How did you get to that number?I have 5000 (wrong solution) and I can't figure out q7 because i don't know the right value for q.opt (q.eq=625?)
To answer both questions, we need to understand the concept of externalities and how they affect market outcomes.
In the given scenario, consumption of the good generates a positive externality, meaning that each person's consumption of the good benefits others in the market.
Let's break down the questions and derive the answers:
QUESTION 1: What is the difference between the optimal level of total consumption minus the amount of total consumption generated by the market?
To find the optimal level of total consumption, we need to consider social welfare, which is the sum of all consumers' utilities. In this case, the utility function for each consumer is given by (1/2)*(q^(1/2))+m +(G^(1/2)), where q represents individual consumption and G represents total consumption in the market.
To determine the optimal level of consumption, we must find the point at which the social welfare is maximized. This occurs when the marginal social benefit of consumption equals the marginal social cost. In this case, the marginal cost of production is constant at 1 $/unit.
To calculate the amount of total consumption generated by the market, we need to sum up the individual consumption levels of all 100 consumers.
The difference between the optimal level of total consumption and the amount of total consumption generated by the market gives us an idea of the efficiency of the market in delivering the optimal outcome.
QUESTION 2: In this case, what is the difference between the optimal level of total consumption and the level of total consumption in equilibrium?
When the good is sold by a monopolist, market outcomes differ from those under perfect competition. As a monopolist has market power, they set prices higher than marginal cost to maximize profits. This leads to a lower level of consumption compared to a competitive market.
To find the optimal level of total consumption, we again need to consider social welfare. The monopolist will choose the level of consumption that maximizes their profits, which may not align with the social welfare-maximizing level.
The level of total consumption in equilibrium is determined by the monopolist's pricing decision and the consumer's willingness to pay. The difference between the optimal level of total consumption and the level of total consumption in equilibrium reflects the inefficiency introduced by the monopolistic market structure.
To summarize, both questions focus on the difference between the optimal level of total consumption and the actual level of consumption in the respective market structures (competitive vs. monopolistic). The answers will vary based on the specific utility function, production costs, and the market power of the firms involved.