Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000 t h gallon of gasoline entails the following:
-a private cost of $3.10;
-a social cost of $3.55;
-a value to consumers of $3.70.
-Refer to Scenario 10-1. Suppose the equilibrium quantity of gasoline is 1,150 gallons; that is, QMARKET = 1,150. Then the equilibrium price of a gallon could be
A) $2.80.
B) $3.00.
C) $3.30.
D) $3.80.

Question

Scenario 10-1
The demand curve for gasoline slopes downward and the supply curve for gasoline slopes upward. The production of the 1,000 t h  gallon of gasoline entails the following:
-a private cost of $3.10;
-a social cost of $3.55;
-a value to consumers of $3.70.
-Refer to Scenario 10-1. Suppose the equilibrium quantity of gasoline is 1,150 gallons; that is, QMARKET = 1,150. Then the equilibrium price of a gallon could be
A) $2.80.
B) $3.00.
C) $3.30.
D) $3.80.

Quizplus · Accepted Answer

At the equilibrium quantity (QMARKET = 1,150), the equilibrium price is where the demand curve and supply curve intersect. From the given information, we know that the private cost of producing gasoline is $3.10 and the social cost is $3.55. This means that the negative externality (difference between private and social cost) is $0.45 per gallon. The value to consumers is $3.70, indicating the maximum price they are willing to pay.

To find the market equilibrium price, we need to find the point at which quantity demanded equals quantity supplied. At a price of $3.30, the quantity demanded is 1,150 gallons, while the quantity supplied is also 1,150 gallons. This price allows for the negative externality to be internalized, as it includes both the private and social costs of production. Therefore, the equilibrium price of a gallon could be $3.30.

Scenario 10-1 The Demand Curve for Gasoline Slopes Downward and the Supply