You are an advisor to the mayor of Iola, a lovely little town with a big problem. Everyone in town drives gas-guzzling Duramax 4x4 pickup trucks (duallies with lift kits, naturally) and when the price of gasoline rose last year consumers really felt the pain. But now that gasoline supply is back to normal, the mayor should be happy that the citizens are able to resume their truck driving habits. The current daily market for gasoline in Iola is described by the following equations: Demand: P = 4 – Q Marginal Private Cost: P = 1 + .5 Q Where P is in dollars per gallon and Q is in 1000s of gallons of gasoline per day. Surprisingly, the mayor isn’t completely happy with the new price of gasoline. “When we were paying $4.50 a gallon, there was less congestion, less noise, and you could actually ride a bike without getting run off the road by a giant truck,” complains the mayor. “And besides, the air was cleaner.” What economic concept explains the mayor’s unhappiness? Assume that each gallon of gas consumed creates extra costs for the citizens of Iola in the form of congestion, noise, and pollution. Researchers from Allen Community College have estimated that the Marginal Social Cost of the consumption of gasoline is described by the following equation: Marginal Social Cost: P = 1 + 2 Q Graph the market. Be sure to fully and clearly label the graph, including: the Demand (D), the Marginal Private Cost (MPC), the Marginal Social Cost (MSC), the Private Equilibrium Quantity (Qpe), Private Equilibrium Price as (Ppe), the Socially Optimal Price (Ps), the Socially Optimal Quantity (Qs), and the Deadweight Loss (DWL). Based on the graph, is the current market price for gasoline above or below the socially optimal price? How will the difference between the market price and the socially optimal price influence the behavior of the citizens of Iola?
You are an advisor to the mayor of Iola, a lovely little town with a big problem. Everyone in town drives gas-guzzling Duramax 4x4 pickup trucks (duallies with lift kits, naturally) and when the
Demand: P = 4 – Q Marginal Private Cost: P = 1 + .5 Q
Where P is in dollars per gallon and Q is in 1000s of gallons of gasoline per day.
Surprisingly, the mayor isn’t completely happy with the new price of gasoline. “When we were paying $4.50 a gallon, there was less congestion, less noise, and you could actually ride a bike without getting run off the road by a giant truck,” complains the mayor. “And besides, the air was cleaner.”
What economic concept explains the mayor’s unhappiness?
Assume that each gallon of gas consumed creates extra costs for the citizens of Iola in the form of congestion, noise, and pollution. Researchers from Allen Community College have estimated that the Marginal
Marginal Social Cost: P = 1 + 2 Q
Graph the market. Be sure to fully and clearly label the graph, including: the Demand (D), the Marginal Private Cost (MPC), the Marginal Social Cost (MSC), the Private
Based on the graph, is the current market price for gasoline above or below the socially optimal price? How will the difference between the market price and the socially optimal price influence the behavior of the citizens of Iola?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
