dse 2012

[econ14]

The demand curve for electricity is D(p) = 120 -p. The
marginal cost of electricity production is MC1(q) = 20 + q. The marginal
cost of pollution due to electricity production is MC2(q) = 3q. Find the
competitive equilibrium output and the social optimum output.
(a) 50; 20
(b) 50; 30
(c) 60; 20
(d) 60; 30

[Granpa Simpson]

The answer will be a..this is because while computing the competitive equilibrium take p= MC of producing electricity only, which means the demand curve is given by p=120-q and the supply curve is p=MC of producing electricity=20+q, equate demand and supply and u will get q=50.
Now for considering the socially optimal output we will have to incorporate the Marginal cost for negative externality too in the supply function, thus the new supply function becomes, p=MC1+MC2=20+4q, equate it with the demand p=120-q and u will get 20 as the socially optimal level of output. Thus option a will be the answer.

[econ14]

thanx subhayu  i was taking mr=mc1 to compute competitive equilibrium output... as it's a downward sloping demand curve .....why is this wrong??

[Granpa Simpson]

My pleasure Sandeep...For a competitive firm the demand curve is given, the only thing that you will have to find out is the supply curve and the supply curve is given by p=MC.

[Homer Simpson]

Waise i am wondering, if they explicitly say this a monopolist, should we then use MR = MC to find "private equilibrium" and do the usual P = MC + MC(pollution) for "social optimum"? Any thoughts on this?

[Granpa Simpson]

Tsuki In that case i think that the optimum level of output will depend on the MC curve which will comprise of MC1 and MC2..this is because in monopoly there is no supply curve, the optimum level depends upon the intersection of MR and MC, AR curve will be the demand curve given and the MC will be defined by MC1+MC2..mone hocche etai hobe..!!!!

[mrittik]

Kulkal pal...this is purely right approach...social optimal means it gives less amount of output as per practical knowledge....tsuki ekhane keno monopoly ke dhokaccho? comp output cheyechena? ki bolo tumi?

[Homer Simpson]

Mrittik, the way the question has been done is correct but i am considering an alternative situation.

Ok, so for private optimum usual MR = MC approach definitely but for social optimum, AR = MC1 + MC2 - ideally, society would like all the costs of production to be incorporated and the need of the entire market to be met? Any thoughts on this?

[Granpa Simpson]

Tsuki..i think the demand curve wont change, thus AR=demand curve the only difference that is going to take place is that for a given level of out the MC will shift as now the externality cost has to be incorporated to find out the socially optimum level and the point of intersection of MR and MC will change..what do u think..??

[Homer Simpson]

Haan definitely demand curve wont change, but society case kei liye, is it correct to take MR = MC1 + MC2 ?? Thats what i am confused about...why would we equate MR and total MC for society case?

[Granpa Simpson]

The monopoly equilibrium depends on the intersection of the MR and MC curves..in this case MR curve remains the same as the demand curve does not change, the only difference is that MC shifts and point of intersection changes here MR is not equal to MC1+MC2, MC=MC1+MC2, when you are saying that MR=MC1+MC2 it means that the MR will also change..in this case MR wont change, the change will be occur only for the MC curve and hence the point of intersection will change..!!!

[The Villain]

@tsuki ..its asking for competitive eqm and not profit maximising hence the condn p=mc..

[Homer Simpson]

Ron, i do get that. I am considering an alternative scenario to this question - where they talk about a monopolist's private equilibrium. My confusion is : What should be the social equilibrium? thats what i am asking.

[mrittik]

then why MR = MC1 + MC2...why not P=  MC1 + MC2 for competitive social optimum....ki bhabcho? tmi jei AR er idea dile seta te public sector e wage er khetre use kora hoy...

[Granpa Simpson]

The monopoly equilibrium depends on the intersection of the MR and MC curves..in this case MR curve remains the same as the demand curve does not change, the only difference is that MC shifts and point of intersection changes here MR is not equal to MC1+MC2, MC=MC1+MC2, when you are saying that MR=MC1+MC2 it means that the MR will also change..in this case MR wont change, the change will be occur only for the MC curve and hence the point of intersection will change..!!!

[Homer Simpson]

Thanks, i got my answer now :) Sorry eto pareshaan korlam :P

[Granpa Simpson]

absolutely alright Tsuki..but did you get ur answer thinking on the same track..seta share koro plz..:)

[mrittik]

eta kemon bangla? social output of bangla is diminished to accomodate ur ideas....ha ha ha...ur first lang is not bengali but still u try it in social mix...hats off jaysmita alias tsuki...

[Homer Simpson]

subhayu - Understood your explanation basically.
Mrittik -  lol its my mother tongue

[hbk]

2012 ques no 23..how to solve it.