Question

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. $16.
b. $4.
c. $8.
d. $32

Answer 1

Answer:

a. $16.

Explanation:

the firm offer a price where marginal revenue = marginal cost

We have to solve at which quantity the price is $1.

There, the marginal revenue would match the marginal cost.

1 = 5 - 0.5q

q= (5 -1) /0.5 = 4/0.5 = 8

Now, we solve or the price at which quantity is zero:

p = 5 - 0.5(q) = 5 - 0 = 5

With that we can now solve for the consumer good as the area of the triangle above the marginal cost and below the demand function

(see attached graph)

8 x (5-1) / 2 = 16