NOTE: In this problem set, PS = Producer Surplus, CS = Consumer Surplus, TS = Total Surplus, DWL = Deadweight Loss. 1) Consider a perfectly competitive market without externalities. Market demand is given by P = MWTP = 24 - Q and market supply is given by P = MC = =Q +6. la) What is the highest total surplus possible? Solution: Since we have no externalities, marginal social benefit is the marginal private benefit, i.e. MWTP. The marginal social cost is the marginal private cost which is the MC(@) function. To maximize surplus. we line up all individuals in order of decreasing MWTP and increasing MC and find the highest output for which MWTP 2 MC. The point at which MWTP = MC is the point we go from an extra unit of output increasing surplus to it decreasing surplus. This quantity is where S = CS + PS = = * 18 x 21-6 24 - Q = Q +624 = 194.4 = 18 Q 21.6 21.6 The surplus at this quantity is the area below the MWTP curve and above the MC curve. (NOTE: We are not calculating market outcomes here and there is no price so we can't find and do not want to find consumer and producer surplus.) The area below the MWTP curve is calculated by (draw a diagram and see how you would calculate it if you can't figure out where we got these numbers from) 0.5 * (24 - 16.8) * 21.6 + 21.6 * 16.8 = 440.64 (Note: there is no price, we are just using the number to break up the shape into a triangle and a rectangle) The area below the MC curve is calculated by. 0.5 * (21.6) * (16.8 - 6) + 21.6 *6 = 246.24 The difference gives us total surplus. TS = 440.64 - 246.24 = 194.4