Asked Oct 27, 2019

Question 5
Suppose that the cost function of a firm is C(q)=4q. Suppose that this is the only firm in the market, and demand is Q(p)=10-p. What is the Consumer Surplus in a competitive equilibrium in this economy?







Expert Answer

Step 1

Consumer surplus refers to an overall benefit that receives the consumer by paying a price lower than what they would be willing to pay.

Step 2

Consumer surplus in a competitive equilibrium in the given economy can be calculated by using the following formula.


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Consumer surplus=Maximum price-Equili brium price)x Equilibrium price

Step 3

Because in competitive equilibrium P = MC. This implies that profit maximization price is P=4.

Consumer surplus is repre...


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Quantity 10-p 10-4 =6 Consumer surplus=-(10-4)x6 = 3x6 = 18


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