1. Business
  2. Economics
  3. 4 uncertain benefits consider the problem of supplying an input...

Question: 4 uncertain benefits consider the problem of supplying an input...

Question details

4, Uncertain Benefits. Consider the problem of supplying an input to a division of a firm or to a firm in a planned economy. Suppose the executive or planner knows the marginal cost function for the input, represented by the MC line in the figure However, the planner is uncertain about the marginal benefit. Her best estimate is the MB line. On that basis, the price should be p and the quanity q. Consider an error scenario in which the actual marginal benefit is higher, as represented by the MB line. (a) Mark on the graph the quantity q that would be produced using a price control p in the error scenario, and the quantity q that would be efficient in the error 4 scenario (b) Identify the triangle that represents the loss in the error scenario with price control c) Identify the triangle that represents the loss in the error scenario with quantity (d) Discuss the relative sizes of the loss triangles and relate them to the slope of the p, and interpret it in terms of over- and under-production. control q. MC curve,

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution