Question

The inverse demand curve for a product using resource X is given by

P = 60 – 0.2Q and the cost of production is constant at

MC = 10

Find the static equilibrium for this product (recall at equilibrium Supply equates Demand and in this case Supply = Marginal Cost) in a single time period (call this t0).

At equilibrium S = D and S = MC = 10

So you should be able to solve these equations simultaneously to find Q

Draw the static equilibrium.

Equilibrium, you will recall, in a static sense is simply where demand equals supply. Now that you know the equilibrium Q you should be able to draw where supply crosses demand (the price should just line up with S and MC because they are flat in this case).

What is the value of consumer surplus from consumption in t0? (recall, this is simply the area under the demand curve and above the price, which now equates Marginal Cost)

This should be a matter of measuring the area of a triangle (i.e. half a square – height* width*0.5).

Imagine that resource X is infinite in supply or perfectly renewable and that the demand and supply curves are unchanged between years.