Consider a competitive (C) market for ‘hamburger combos’ (hamburger, fries, and a drink) at a fast food restaurant with the following aggregate demand (PD) and aggregate supply (PS) relationships:
PD =30−0.5QD PS =10+0.5QS
(a) Graph these equations in a Demand/Supply diagram (be sure to show the value of any intercept points and label the axis). Calculate the competitive market equilibrium price (PC) and output (QC), and show them on the graph. Show your calculations.
(b) Suppose that a negative pollution externality in ‘hamburger combos’ exists result- ing from the health damages of air pollution produced in the production process. Calculate the socially efficient equilibrium price (P∗) and output (Q∗) given that the socially efficient demand (MWTP) and supply (MSC) for ’hamburger combos’ is as follows:
MWTP =30−0.5QD MSC = 20 + 0.5QS
(c) Graph your results from part (b) in a new Demand/Supply diagram and show the total social benefits (willingness to pay) and costs from the socially efficient price and output (identify these areas in your diagram using A, B, C, etc.). Calculate and explain the net social value in the socially efficient equilibrium. Show your calculations.
(d) Based on your results in parts (a), (b), and (c) use a new Demand/Supply diagram to show the area of the total social benefits, total social costs, and the dead weight loss (DWL) from the competitive market economy. Calculate and explain the net social value as well as the value of the DWL from the competitive market economy. Show your calculations.