Question

Suppose a consumer advocacy group has convinced legislators that vitamin pills should be cheap to consumers. Such a policy would enhance the health of the citizenry, they argue. As a result one bottle of vitamin pills are sold at the price of $3 in the market although the marginal cost is $7. Government would reimburse the $4 difference for sold quantity. Assuming a downwardsloping linear demand curve Q = 100 − P.

a. (8 points) Determine the resulting output and social welfare from such a policy.

b. (8 points) Compare this result to the competitive equilibrium’s output and social welfare.

c. (4 points) Calculate the deadweight loss.

d. (6 points) Explain your intuition why deadweight loss occurs with this policy

Answer 1

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- PM In Empuative 100 -me q3 9 -)-7 - D wL- 8

(a) Delamne tfe Lesating ole and lal war e fromuch CA P=3 b Jo ns2 Sar us2x Cro0-) 99 Cti Consumes 4704.5 Sun plestx(t00-)xq3 at ConSume s 3 24.5 1 Socfal etfare 404.5-43 2q.5 =380 goctal eltare =$380 Competue ehibion to the (ompare tReg Aesult lp and octal wetfore-

- Compot fetue 2galhium 3 Cc) Catcule the decde ghtLo:- DuL2 x3)* (94 -93) 2 X44 EplAn ou nlatoo y dedoeh oA-th thiPoey:- Occeers cdesreaned demand Oncrses Dme Producons makmum lo an DwL OccuIS .