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Suppose the inverse demand function (expressed in dollars) of a product is:

P = 120- 2q

And the marginal cost (in dollars) of producing it is:

MC = 1q

Where P is the price of the product and q is the quantity demanded and/or supplied.

(a) How much would be supplied in a static efficient allocation?

(b) What would be the magnitude of the net benefits (in dollars)?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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One convenient way to express the willingness-to-pay relationship between price and quantity is to use the inverse demand function. In an inverse demand function, the price consumers are willing to pay is experessed as a function of the quantity available for sale. Suppose the inverse demand function (expressed in dollars) or a product is P = 80 - q, and the marginal cost (in dollars) of producing it is MC = 1q, where p is the price of the product and q is the quantity demanded ad/or supplied.

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