Introduction to Economics

INTRODUCTION TO
ECONOMICS
STUDENT ID:
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Question 1
a) Let the equilibrium price and quantity be P and Q respectively.
Hence, 100-0.1Q = 10 +0.1Q
90 = 0.2 Q
Thus, Q = (90/0.2) = 450 units
P = 100 -0.1*450 = $ 55
b) The requisite diagram is shown below.
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0
20
40
60
80
100
120
Market for Education
marginal private benefit
marginal private cost
Quantity
Price
c) It is known that $ 10 is the positive externality attached with the consumption of education.
As a result, the marginal social benefit would be at $ 10 higher value than marginal private
benefit. The intersection point of the marginal social benefit and marginal private cost would
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occur at a quantity of 500 units which is higher from the earlier equilibrium quantity of 450
units.
Deadweight loss = 0.6*(65-55)*500 = $2,500
d) Considering that positive externality of $ 10 exists, the market outcome can be improved If
the government decides to provide subsidy which would make the price paid by consumers
lower and hence allow increase in consumption by the society which would lead to welfare
gains. This is because the current consumption pattern does not consider the positive
externality being derived owing to which measures need to be taken to enhance the
consumption as these would benefit the society. Through subsidies, the price paid by the
consumer would decline and hence the consumption would approach a socially efficient
level.
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