1. a. Suppose the marginal social cost of television sets is $100. This is constant and equal to the average cost of television sets. The annual demand for television sets is given by the following equation: Q 200,000 500P, where Q is the quantity sold per year and P is the price of television sets. If television sets are sold in a perfectly competitive market, cal- culate the annual number sold. Under what circum- stances will the market equilibrium be efficient? b. Show the losses in well-being each year that would result from a law limiting sales of television sets to 100,000 per year. Show the effect on the price ,marginal social benefit, and marginal social cost of television sets. Show the net loss in well-being that will result from a complete ban on the sales of television sets.
2. Suppose perfect competition prevails in the market for hotel rooms. The current market equilibrium price of a standard hotel room is $100 per night. Show that the current market equilibrium is efficient, assuming that both the marginal cost incurred by sellers and themarginal benefit perceived by buyers reflect all costs and benefits associated with production and use of hotel rooms. Suppose a $10 per night tax is levied on hotel occupancy. Show how this tax will prevent the market from achieving efficient output. Show the loss in net benefits from hotel use resulting from the tax.