Reference no: EM132026948

A new report from the Moldavian finance minister finds that peanut brittle consumption raises dental insurance costs throughout the country; they conclude, therefore, that the marginal social benefit of peanut brittle in Moldavia is actually:

MSB = 12 - 2*Q

Marginal private benefit of peanut brittle consumption continues to be given by the domestic D curve:

MPB = P = 12 - Q

Moldavia is a small country that initially does not trade with the rest of the world. Nut N' Honey Farms has a monopoly on the production of peanut brittle in Moldavia. The following information describes Nut N' Honey's monopoly status in the peanut brittle market in Moldavia: 

Demand: P = 12 - QD 

Marginal Revenue: MR = 12 - 2*Q

Total Cost: TC = 12 + (1/2)*Q^2

Average Total Cost: ATC = 12 / Q + (1/2)*Q

Marginal Cost: MC = Q

Where P is measured in $ / lb. and Q is measured in lbs. of peanut brittle.

1) In light of this new report, the efficient quantity of peanut brittle in Moldavia is now:

A.  6 lbs.

B.  8 lbs.

C.  12 lbs.

D.  4 lbs.

2) Explain why the free trade equilibrium here is now NOT efficient. Use the letter "C" to label the DWL associated with free trade given the finance minister's findings.

Your labeled area "C" of DWL in this case is bounded by the ___________ curves between the quantities of ___________lbs. of peanut brittle.

A.  MC and MSB ; 4 and 8

B. MC and D ; 4 and 6

C. MC and D ; 4 and 8

D. MC and MSB ; 4 and 6

3) The finance minister argues that banning trade IS efficient. Explain why she is right. [Hint: Both areas "A" and "C" should figure prominently in your explanation here.]

Banning trade is efficient here, because although the sum of consumer and producer surplus ______________ when Nut N' Honey's monopoly status is restored, Moldavia ____________ in externality costs as a result. 

A.  Falls by C ; Saves A + C

B. Falls by C ; Saves C

C. Falls by A ; Saves A + C

D. Falls by A ; Saves A