What is the dollar value of the deadweight loss

Reference no: EM132196957

Question: Suppose the demand for automobile tires in the US is: Qd=112-2.10P where Qd is quantity demanded in millions of tires and P is the price per tire.

1. If the private marginal cost (PMC) of producing tires is a constant $20, calculate the market equilibrium quantity.

2. Explain what a constant marginal cost implies. Does that mean the total opportunity cost of producing tires is unrelated to how many are produced?

3. At the equilibrium, what is the private marginal benefit (PMB) of tires? Explain how, if tires have no consumption externalities, the PMB would equal the social marginal benefit.

4. The production of tires involves the processing of rubber. Let's assume the manufacturing process emits toxic fumes that affect those living around the manufacturing plants. The marginal damage (MD) of tire production is $10/tire. Calculate the socially efficient output of tires.

5. Calculate the total social cost and benefit of tire production at the efficient level. Calculate the net benefits to society of tire production.

6. Go back and calculate the net benefits to society at the market equilibrium calculated in part A. Explain why the market solution generates less net benefits to society than the efficient solution calculated in part D.

7. What is the dollar value of the deadweight loss generated by the market?

Reference no: EM132196957

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