Assume that the supply curve is horizontal because marginal cost is constant at $10.John,Robert,and Jimmy each value one compact disc at $20 but only Jimmy and John value a second compact disc (Jimmy at $5 and John at $15).If a social planner dictates that five compact discs be produced and distributed to John,Robert,and Jimmy,then even if the compact discs are allocated based on demand,this market will lose out on $___ of value.
A) $5.
B) $10.
C) $15.
D) There will be no lost value as five compact discs is the efficient level..

Question

Quizplus · Accepted Answer

The total value of the five compact discs according to the willingness to pay of John, Robert, and Jimmy is $(20+20+20+5+15) = $80. However, if the market is allowed to allocate the compact discs based on demand, only four discs will be sold (one to Robert, one to Jimmy, and two to John), resulting in a total value of $(20+20+5+15) = $60. This means that $20 worth of value is lost. Therefore, the answer is (A) $5 (since the question asks for the lost value).

Assume That the Supply Curve Is Horizontal Because Marginal Cost