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Questions
Demand for a product called widgets is given by Y = 100 - p/2. Supply is given by Y = 2p - 10, where Y is the quantity of widgets per month and p is the price of widgets. Assume a perfectly competitive industry.
1. Graph the supply and demand curves, find the competitive market price and quantity of widgets and show them on the graph.
2. Suppose the production of widgets creates pollution damages of $10 per unit of widget produced. Find the economically efficient levels of price and the quantity of widgets and show them on your graph.
3. What is the size of the efficiency gain (increase in net social benefits) if the economy were to move from the competitive quantity of widgets to the efficient quantity?
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