Question

Output MWTP MC 1 20 5 2 18 6 3 16 7 4 14 8 5 12 9 6 10 11 7 8 15 8 6 21 9 4 30 10 2 40 1. The values for MWTP and MC are given belohli a. Graph these curves and find equilibrium. b. label consumer and producer surplus. c. Show that any other level [Q] the net social bei!!! Why?

Answer 1

The values of Marginal Willingness to pay and Marginal Cost are graphed in the following diagram. Equilibrium is attained where the MC curve and MWTP curve intersect each other, i.e., approximately at 6th unit of output.

The area under MWTP curve and above the equilibrium level of price  shows the consumer surplus as is shown in the diagram. This is the consumer surplus because for units 1 to 6, consumer was willing to pay more but has to pay less. Due to this, we have consumer surplus.

Similarly, the area above the MC curve and below the equilibrium price is producer surplus. This is because, uptil unit 6, the producer's cost was lesser. However, he is getting more in the form of equilibrium price. This acounts for producer surplus.

Now let us consider any other level of output, other than the euilibrium level, say 4th unit of commodity. Here MWTP is more than the MC. And we know that as the units of output increase, our marginal willingness to pay for a good will go on declining and marginal cost will keep on increasing. Hence there is a scope for improving both the producer as well as consumer surplus at this point (as is marked in the diagram). Hence, here net social benefit (sum of consumer and producer surplus) is lesser than the equilibrium price level.

Now let us consider another level of output, say 8th unit of output. Clearly, here MC of the producer rises to an extent where the commodity is no more affordable for the consumer. This is a clear indication of lesser net social benefit as compared to the equilibrium level.

Therefore, it is clear that any point to the left or to the right of equilibrium quantity will denote lesser net social benefit. This is why equilibrium quantity and price are most preferred.

Margind cost Marginal Doilinglesa to say, 36 Marginal 24 (c) A comsum АН- to tequilibrium I -! Producu sufitus SMWTP cathe , į 2 3 4 5 6 7 8 9 10 - Output