Ch. 4 allocative efficiency CS and PS.pdf

2 Pages
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Department
Economics
Course Code
ECON 1900
Professor
Nancy Carson

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Allocative Efficiency: Maximize Total net benefits to society by producing where Marginal Benefits = Marginal Cost.  Total net benefits = Total Benefits – Total Opportunity Costs.  Total net benefits = Consumer surplus plus Producer Surplus. (Total net benefits are divided between these two groups by the market price.)  Consumer Surplus is the difference between the total benefits that the consumers receive and their expenditure on the good.  Producer Surplus is the difference between the total revenue that the producers receive and the total opportunity cost of producing the good. Demand and Supply are illustrated as step functions for this diagram. P The equilibrium price is $60 per unit. The equilibrium quantity is 3 units. 100 S -Consumers are willing to pay $100 for the 80 first unit. The first unit adds $100 to total benefits. (The marginal benefit of the first 60 unit is $100.) The total benefit at one unit is $100. -Consumers are willing to pay $80 for the 40 second unit. The second unit adds $80 to 20 total benefits. (The marginal benefit of the D second unit is $80.) The total benefit at two units is $180. --Consumers are willing to pay 0 1 2 3 4 5 6 $60 for the third unit. The third unit adds $60 Q to total benefits. (The marginal benefit of the third unit is $60.) The total benefit at three units is $240. -...The marginal benefit of the fourth unit is $40. The total benefit at four units is $280. -The marginal benefit of the fifth unit is $20. The total benefit at five units is $300. -The marginal benefit of the sixth unit is $0. At the equilibrium price of $60 consumers buy 3 units. They were willing to pay $100 for the first unit, but only had to pay $60 for that unit. They were willing to pay $80 for the second unit, but only had to pay $60 for that unit. They were willing to pay $60 for the third unit, and had to pay $60 for that unit. The most consumers are willing to pay for the fourth unit is $40, so consumers won’t buy the fourth unit for $60. The Total benefit to consumers at 3 units is $240. Total expenditure at 3 units is P×Q = $60×3=$180. The consumers surplus at three units = $240 - 180 = $60. -The least that producers are willing to accept for the first unit is $20, because the first unit costs $20 to produce. The first unit produced adds $20 to the total cost of production, so the marginal cost of the first unit is $20. Total cost at one unit is $20. -The least that producers are willing to accept for the second unit is $40, because the second unit costs $40 to produce. The second unit produced adds $40 to the total cost of production, so the marginal cost of the second unit is $40. Total cost at two un
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