This is Boxland’s marginal utility and total cost schedules for boxes are as fol

Question

This is Boxland’s marginal utility and total cost schedules for boxes are as follows (all units in thousands):

Boxes Marginal Utility Total Cost

1                $10               $2

2                  9                  5

3                   8                  9

4                    7                14

5                    6                20

6                    5                27

7                    4                35

8                    3                44

9                   2                54

a) What is the efficient level of output?

b) What are the supply and demand schedules for boxes, and the equilibrium output and price?

c) Explain why the free market does or does not achieve the efficient level of output.

Explanation / Answer

Note that marginal utility schedule can be depicted as marginal benefit curve which is the demand curve in this case. Marginal cost curve which is the supply curve in this case interacts with Marginal benefit curve to determine market equilibrium

a) This is achieved when MB = MC. Here MB = MC = 6 and the efficient level of output is 5000 boxes

b) This is shown in table below. Marginal benefit curve is the demand curve in this case. Marginal cost curve is the supply curve

c) Because it does not take external cost imposed on the society.

Q MU TC MC 1 10 2 2 2 9 5 3 3 8 9 4 4 7 14 5 5 6 20 6 6 5 27 7 7 4 35 8 8 3 44 9 9 2 54 10

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