A car manufacturer faces a downward-sloping demand curve, meaning they must lower the price to sell more cars. The marginal cost to produce each additional car is constant at $14,400. The price consumers are willing to pay for the 64th car is exactly $14,400. For any quantity greater than 64, the price consumers are willing to pay is less than the marginal cost. Which statement best analyzes the total gains from trade (the sum of consumer and producer surplus) in this market?

Analyzing Gains from Trade

A car company faces a market where for the first 64 cars produced, the price consumers are willing to pay is greater than or equal to the marginal cost of production. For the 64th car specifically, the willingness to pay is exactly equal to the marginal cost. Based on this information, producing and selling a 65th car would necessarily decrease the total surplus (the sum of consumer and producer surplus) generated in the market.

Production Decision for Maximum Social Welfare

A car company's marginal cost to produce each car is constant at $14,400. The market demand is such that the price consumers are willing to pay changes with the quantity sold. Match each production unit with its effect on the total gains from trade (total surplus).

A car manufacturer has a constant marginal cost of $14,400 per car. The market demand for their cars is represented by a straight line. At a quantity of zero, the price consumers are willing to pay is $40,000. The willingness to pay decreases as more cars are sold, reaching exactly $14,400 for the 64th car. What is the maximum possible total surplus (the sum of consumer and producer surplus) that can be generated in this market? (Enter a number only, without commas or currency symbols).

Profit Motive vs. Social Surplus

A company manufactures a unique type of electric car. The marginal cost to produce each car is constant at $30,000. Due to the nature of demand, the price consumers are willing to pay for a car decreases as more cars are produced and sold. For the 64th car, the maximum price a consumer is willing to pay is exactly $30,000. Arrange the following production decisions in descending order, from the one that adds the most to the total surplus (gains from trade) to the one that adds the least (or subtracts the most).

A firm produces a product with a constant marginal cost of $14,400 per unit. The market demand is such that consumers are willing to pay $27,200 for the 32nd unit and $14,400 for the 64th unit. For any quantity between 32 and 64, the price consumers are willing to pay is between $27,200 and $14,400.

A consultant provides the following advice: "To maximize the total gains from trade (the sum of consumer and producer surplus), you should produce exactly 32 units. At this quantity, the surplus on the last unit produced is large ($27,200 - $14,400 = $12,800). Producing beyond 32 units will result in a smaller surplus on each additional unit, thus decreasing the total surplus from its maximum."

Which of the following best assesses the consultant's advice?

The Limit of Socially Beneficial Production