Tangled Reviews
Question on Demand? How to determine social optimal production…?
I was reviewing some questions before a test and got a little tangled up on a question. The question was phrased:
10 people have the demand Q=20-4P for stop signs. The cost of each is $3. What is the social optimal level?
Do you just say 0=20-4P, solve for P and then multiply that by 10? That just seems way to easy…
Thanks guys.
Putting the quantity at 0 would give you the price for which the optimal output was 0.. This is clearly not the case. Multiplying that by ten? Doing that would just make your price at 0 quantity equal to 50$.. instead of it actually being 5 (which it is)
What you have to remember is when you’re tyring to find the social optimal level of a certain thing you have to isolate that term (i.e. looking for optimal price, isolate price, when looking for quantity, isolate quantity) You’re given the cost/price, which is 3$.. therefore you just sub in 3$ and you will easily find the Quantity demanded.
What you do is assume that since all the demand is the same, the market has one single demand function, which is defined by Q=20-4P.
you sub the 3$ as said..
Q=20-4(3)
=8
Sub in 8 to the original equation and you’ll find that the price is 3$.
Optimal P=$3, Optimal Q=8 Stop Signs.
I tried to explain it in depth, not to waste your time but I find, even in myself, the more you think or know about economics, the more you forget about the basic rules of things and sometimes can find yourself overthinking. 
hope i helped.
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February 10, 2012 11:15 am 
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