Answered: Figure 2. Marginal Social Benefit of X…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter7: Production, Costs, And Industry Structure

Section: Chapter Questions

Problem 42P: A small company that shovels sidewalks and driveways has 100 homes signed up for its services this...

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Question

Figure 1 below shows two production possibilies frontiers (PPFs). The solid one is
the original one. The dashed one is the PPF after a technological advance that has
benefitted only the Y indusry. As an example, think of the invention of fruit
picking robots that benefits only agricultural production and is of no use in
software production.
Figure 2 shows the marginal social benefit (MSB) of X production in terms of
sacrifices of Y. For example, to produce the first unit of X, the society is willing to
give up 40 units of Y. For the second unit the socirty is willing to sacrifice only 35
units of Y.

Before the technological advance:
1. What are the marginal social costs (MSCs) of producing the second,
third, and the fourth units of X in terms of the sacrifices of Y. Do you
remember the reasons for these results?
2. What are the allocatively efficient quantities of X and Y?
3. Suppose that due to some good news about various health benefits of X,
the marginal social benefit of X increases by 10 units at every level of X
production. For example, before, people were willing to sacrifice 40 units
of Y to produce the first unit of X. Now, after they hear the good news,
they are willing to sacrifice 50 units of Y for the first unit of X. Similarly
for the other levels of X production. In other words, the MSB line in
Figure 2 shifts up by 10 units at every value of X. What will be the
allocatively efficient levels of X and Y now?

After the technological advance:
1. What are the marginal social costs (MSCs) of producing the second,
third, and the fourth units of X in terms of the sacrifices of Y. Do you
remember the reasons for these results? Can you think of the reason for
the difference in the results compared to what you found above?
2. What are the allocatively efficient quantities of X and Y now? Can you
explain the reason why you got a different result compared to the one you
got above?

Figure 2. Marginal Social Benefit of X
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X Production
MSBX
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Y Production
Figure 1. Production Possibilities Frontier
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OUS BRBREADUSASA:
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X Production

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