1a. Suppose the marginal cost of a television set 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 the television sets. Is the television sets
are sold in a perfectly competitive market, calculate the annual number sold. Under what circumstances
will the market equilibrium be efficient?
1b. 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. A prominent senator has calculated the total social benefit of the current amount of space
exploration at $3 billion per year. The total social cost of space exploration is currently only $2 billion.
The senator argues that a net gain to society would result by increasing the amount of space exploration
until social costs rise enough to equal total benefits. Is the senator’s logic correct?
3. The market equilibrium price for rice in Japan would be $3 per pound in the absence of government
subsidies to rice production. However, the government sets the price of rice at $5 per pound and agrees
to buy all the rice produced by farmers at that price. Assume that points on the demand curve for rice
equal the marginal social benefit of alternative quantities, while points on an upward-sloping supply
curve equal the marginal cost of various quantities. Show how the subsidy program will result in loss in
efficiency.
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