Question

5 2. (15) Social Surplus Analysis The table below describes a market with two consumers and two producers. It gives each consumer's demand curve and each producer's supply curve for integer quantities of the good. The demand and supply curves are all linear. Let p denote price, and q quantity Cons I D Cons 2 D Agg D Firm 1 S 10 Firm 2 S Agg S S5 12.5 10 7.5 $4 S3 S2 SI SO 2.5 a) (3) Fill in the numbers in the two blank columns. What are the equilibrium quantity and the equilibrium price? Draw a diagram displaying the aggregate demand (Agg D) and aggregate supply (Agg S) curves. b) (3) State the two assumptions under which the aggregate marginal social benefit curve coincides with the aggregate demand curve, and the single assumption under which the aggregate marginal social cost curve coincides with the aggregate supply curve. c) (3) On the assumptions that the aggregate marginal social benefit curve coincides with the aggregate demand curve and that the aggregate marginal social cost curve coincides with the aggregate supply curve, calculate the (dollar) social benefit at the equilibrium, the (dollar) social cost at the equilibrium, and the (dollar) social surplus at the equilibrium. (Recall that the area of a triangle is one-half the base times the height). d) (3) Write down the algebraic equations for the aggregate demand and aggregate supply curves, and verify that their point of intersection gives the same equilibrium quantity and price that you obtained in a). e) (3) Decompose the social surplus you have calculated in c) into consumer surplus, producer surplus, and government surplus

Answer 1