Suppose that the private marginal cost for a product's (corn) consumption is given bythe MB curve (or MB = 360 – 4Q) and the private marginal cost associated with itsproduction is given by the MPC curve (or MC = 6Q). The diagram is presented below.P (S)360MPC3202802402162001601208040MB10Q per year20304050607080901. If the producers of rice wants to maximize profit up to what level of output will itproduce and at what price? What condition should be met in order for the firms toefficiently produce this level of output?2. Suppose that externalities exist in the market for corn (e.g., pollution and wastesdumped in nearby water reservoir producing ice cream) and this has inflicteddamage to nearby community. The associated marginal damage was estimated asMD = 20. Sketch, in the same diagram, the MD (marginal damage) associatedwith this good's production. Explain why MD curve is upward sloping.3. Given the damage inflicted by the negative externality created by this market,sketch in the same diagram the MSC (marginal social cost). Explain how the MSCcurve is derived. What does the MSC represent?

Given that: MB = 360 - 4QMPC = 6Q Let us draw the graph as under:

Answered: 1. If the producers of rice wants to…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that the private marginal cost for a product's (corn) consumption is given by
the MB curve (or MB = 360 – 4Q) and the private marginal cost associated with its
production is given by the MPC curve (or MC = 6Q). The diagram is presented below.
P (S)
360
MPC
320
280
240
216
200
160
120
80
40
MB
10
Q per year
20
30
40
50
60
70
80
90
1. If the producers of rice wants to maximize profit up to what level of output will it
produce and at what price? What condition should be met in order for the firms to
efficiently produce this level of output?
2. Suppose that externalities exist in the market for corn (e.g., pollution and wastes
dumped in nearby water reservoir producing ice cream) and this has inflicted
damage to nearby community. The associated marginal damage was estimated as
MD = 20. Sketch, in the same diagram, the MD (marginal damage) associated
with this good's production. Explain why MD curve is upward sloping.
3. Given the damage inflicted by the negative externality created by this market,
sketch in the same diagram the MSC (marginal social cost). Explain how the MSC
curve is derived. What does the MSC represent?

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With the existence of negative externality, determine the socially efficient level of output and price.
When negative externality exists, the firms loose profits. Calculate the size of the firms’ loss.) On the other hand, the community’s gain from the social efficient allocation level. Interpret the results.
Determine the net gain (or loss) to the society.

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