Managerial Economics 12th Edition by Mark Hirschey

Exercise 3

Social Welfare. Natural gas is in high demand as a clean-burning energy source for home heating and air conditioning, especially in major metropolitan areas where air quality is a prime concern. The domestic supply of natural gas is also plentiful. Government reports predict that gas recoverable with current technology from domestic supply sources is sufficient to satisfy production needs for more than 50 years. Plentiful imports from Canada are also readily available to supplement domestic production. To illustrate the net amount of social welfare generated in this vigorously competitive market, assume that market supply and demand conditions are
Q S = -2 , 000 + 800 P (Market Supply)
Q D = 4 , 500 - 500 P (Market Demand)
where Q is output in Btus (in millions), and P is price per unit. A British thermal unit (Btu) is an English standard unit of energy. One Btu is the amount of thermal energy necessary to raise the temperature of one pound of pure liquid water by one degree Fahrenheit at the temperature at which water has its greatest density (39 degrees Fahrenheit).
A. Graph and calculate the equilibrium price-output solution.
B. Use this graph to help you algebraically determine the amount of consumer surplus, producer surplus, and net social welfare generated in this market.