Suppose all individuals are identical,and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month.The firm faces a constant marginal cost of $1.Potential consumer surplus equals
A) $4.
B) $8.
C) $16.
D) $32.

Question

Quizplus · Accepted Answer

To find the potential consumer surplus, we need to first find the market equilibrium price and quantity by setting the demand equal to the marginal cost:

5 - (1/2)q = 1

Solving for q, we get:

q = 8

Plugging back into the demand equation, we get:

p = 5 - (1/2)(8) = 1

So the market equilibrium price is $1 per hour and the market equilibrium quantity is 8 hours per month.

To find the potential consumer surplus, we need to find the area below the demand curve and above the price line, up to the equilibrium quantity:

[5-1]/2 * 8 = $16

Therefore, the answer is C) $16, which is the potential consumer surplus. The firm's profit is:

Profit = (Price - Marginal Cost) x Quantity
Profit = ($1 - $1) x 8
Profit = $0

Since the price equals the marginal cost, the firm is making zero profit at the equilibrium level.

Suppose All Individuals Are Identical,and Their Monthly Demand for Internet