dolution

 

1. Consider the market for some product. The demand and supply curves are given by:

           

                                    Demand: p = 30 − 4Q^D

Supply: p = 6 + 2Q^S

 

 

a. Plot the demand and supply curves on a scale diagram. Compute the equilibrium price (p∗)and quantity (Q∗)

 

b. Show in the diagram the total value that consumers place on Q∗ units of the good.

 

c. What is the value that consumers place on an additional unit of the good?

 

d. Now suppose that production costs fall, and thus the market supply curve shifts to a new position given by p = 2 + 2QS .How do consumers now value an additional unit of the good?

 

e. Explain why consumers’ marginal value has fallen even though there has been no change in their preferences (and thus no change in the demand curve).