Demand in the apricot market can be expressed as P=100-Q. Further, the supply function in the apricot industry is P=10+Q. If a social planner specifies that 30 units be produced, is that level of production efficient? Can you propose a more efficient level of production? Explain why your proposed level is better than that of the social planner.
What will be an ideal response?
At a production level of 30 units, the marginal value is 70 while the marginal cost is only 40. Hence, 30 units is below the efficient level. The most efficient level is where supply crosses demand (in the absence of externalities) which occurs at 45 units. The proposal of 45 units captures more surplus than does the social planner's proposed 30 units. The social planner's level was too low. Since the marginal value at 30 units was higher than the marginal cost at 30 units, he should have increased the production level.
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