One convenient way to express the willingness-to-pay relationship between price and quantity is to use the inverse
Question:
One convenient way to express the willingness-to-pay relationship between price and quantity is to use the inverse demand function. In an inverse demand function, the price consumers are willing to pay is expressed as a function of the quantity available for sale (this can be computed from a “standard” demand function, where q is given as a function of p, by solving the equation for p). One reason why it is convenient to use the inverse form is because this relates more clearly to the way we usually draw graphs of supply and demand. For example, suppose the inverse demand function (expressed in dollars) is for a product is p = 80 – 2q, and the marginal cost (in dollars) of producing it is MC = .5q, where p is the price of the product and q is the quantity demanded and/or supplied. Answer the following questions both algebraically and with a graph.
(a) How much would be supplied in a static efficient allocation?
(b) What did I mean by “static”? What did I mean by “efficient”?
(c) What would be the magnitude of the net benefits, in dollars?