Question

Chinese steel company Wuhan Iron and Steel has found a chromium deposit in northwestern Xinjiang, not far from the Kazakh border. (Chromium is added to steel to make stainless steel, which is highly resistant to corrosion and discoloration.)

WIS's MWTP for the chromium is 31200 - 520 Q, and the marginal cost of extraction is $5200 per ton.

How much would the mine have to produce to satisfy every economic use, i.e. every use for which the value of the use is greater than the cost of extraction?

Another way of solving the same problem is to look at the "Marginal Net Benefit" curve, which is that part of the demand curve that is above the MCE. The formula for the MNB is just the benefits (MWTP) minus the costs (MCE). What is the formula for MNB? It should be MNB = R + S Q, where R and S are numbers. What is R and what is S?

Answer 1

We know magical benefit=marginal willingness to pay and marginal cost=5200

Thus marginal net benefit=Marginal benefit-Marginal cost=31200-520Q-5200

Thus marginal net benefit=26000-520Q

Thus R=26000 and S= -520

and efficient quantity=Marginal net benefit=0 Thus Economic efficient output=50