Consider the market for first-aid training class.Market demand is given byP=600-Q Market supply is given by P=Q Individuals who have received first-aid training are very helpful in someurgent situations.More specifcally,first-aid training will generate apositive spillover equal to 3/4Q What is the deadweight loss if the extemality is not dealt with? DWM=40,500 None of the other answers is correct DW1=20,250 DWM=40.000 DWL=20,000
Question
Consider the market for first-aid training class.Market demand is given byP=600-Q Market supply is given by P=Q Individuals who have received first-aid training are very helpful in someurgent situations.More specifcally,first-aid training will generate apositive spillover equal to 3/4Q What is the deadweight loss if the extemality is not dealt with? DWM=40,500 None of the other answers is correct DW1=20,250 DWM=40.000 DWL=20,000
Solution
The question is asking for the deadweight loss (DWL) in a market for first-aid training classes, given a positive externality (spillover) of 3/4Q.
Here are the steps to solve this:
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First, we need to find the socially optimal quantity (Q*) where the social benefit equals the social cost. The social benefit is the sum of private benefit (given by the demand curve P=600-Q) and the external benefit (given by 3/4Q). The social cost is given by the supply curve (P=Q).
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Set the social benefit equal to the social cost and solve for Q*:
600 - Q + 3/4Q = Q 600 = 2Q Q* = 300
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Next, find the price at Q* from the supply curve (since suppliers don't consider the externality):
P* = Q* = 300
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The market equilibrium quantity (Qm) and price (Pm) are found where the demand curve equals the supply curve:
600 - Qm = Qm Qm = 300 Pm = 300
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Since Q* = Qm, there is no deadweight loss in this market, even with the externality. The market is already at the socially optimal outcome. So, the correct answer is "None of the other answers is correct".
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