Question

Question 2 (15 points) Continuing your analysis of the competitive US manufacturing industry from Question 1, with demand of Q = 200-P and supply of Q. = P-20, suppose a technological innovation causes the supply curve to shift down by $20 for every given quantity Q. • Depict the original supply, the new supply, and the original demand curves on the usual P, Q diagram. Label all intercepts. Clearly indicate and label the new market equilibrium. 2/8/2 compass 20 Mlinois.edu/bbcswebdavipid-4037356-dt-con020%20ECON528%20M6 Team 1.20Assignment203%20V2.docx • Determine the new supply equation. Solve for equilibrium price and quantity. • Graphically indicate the areas of Consumer Surplus (CS) and Producer Surplus (PS) that resulted from the new market equilibrium. • Compute the values of Consumer Surplus (CS) and Producer Surplus (PS) associate with the new market equilibrium. • Who has benefited from technological innovation, based on the comparison of CS and PS in Questions 1 and 2? Consumers, producers, or both? Why? (Narrative response, suggested length of three to four sentences or one paragraph.)

Answer 1

a. original equilibrium: 200-P=P-20 or 2P=220 hence P=110 and Q=90

equilibrium after the innovation:

supply curve equation, for each P will go down by 20 for each Q

hence Q=(P+20)-20 or P=Q

now equilibrium will be, P=200-P hence P=100 and Q=100

Now writing down the

Demand curve: Q=200-P or P=200-Q , when P=0, Q=200 When Q=0, P=200

Supply curve: old: Q=P-20 or   P=Q+20   when Q=0,P=20

Supply curve : new: P=Q when P=0,Q=0

THE RED ARE DEPICTS NEW CONSUMER SURPLUS

200 SUPPLY OLD SUPPLY NEW H 90 100 200

THE GREEN AREA DEPICT NEW PRODUCERS SURPLUS .

THE VALUE OF NEW CONSUMER SURPLUS= 0.5(200-100)X100=5000

THE VALUE OF NEW PRODUCER SURPLUS=0.5(100-100)100=5000

BOTH PRODUCERS AND CONSUMERS BENEFITTED.

WHY?

BECAUSE CONSUMER ARE GETTING MORE AT LESSER PRICE.

PRODUCERS ARE PRODUCING MORE AND THEIR PROFIT ALSO INCREASING(PRICE DECREASED 10 BUT THEIR COST HAD GONE DOWN BY 20)

4 SOLUTION:

GIVEN DEMAND, Q=30-0.1P OR P=300-10Q

OR TOTAL REVENUE, PQ=300Q-10Q^2

MARGINAL REVENUE,MR= d/dQ(300Q-10Q^2)=300-20Q

GIVEN MC=5Q

HENCE, EQUILIBIRUM AT MC=MR OR 5Q=300-20Q OR Q=300/25=12 AND P=300-120=180

BUT SOCIALLY OPTIMAL OUTPUT, MC=P OR 300-10Q=5Q OR Q*=15 AND P*=150

orange area: DWL MC=5Q red area=CS green area=PS AR=300-100 MR=300-200 12 15=Q socially optimal

in social optimal condition, the price equals MC. that means at that level producers can produce at a level where they just get back the cost they incur while producing the last unit. on the other hand, the consumers get the price at less price.

in social optimal level, there is no deadweight loss. as shown in the diagram:

MC=5Q red area=CS 180 150 green area=PS AR=300-100 MR=300-200 12 15=Q socially optimal

I hope you liked the answer. give a thumbs up if it helped you.

comment down if you have any doubt