The demand for cigarettes is given by Figure 1 P = 550 - 0.2Q. Price 650- Cigarettes are manufactured at a constant marginal cost of 100 and sold in a competitive market. 600- 550 What is the quantity of cigarettes sold in equilibrium? 500 450- Oprivate = 400- 350- If cigarettes generate a marginal external cost of MEC = 0.20Q, what is the socially optimal level of cigarettes? 300 250 Qsocially optimal" %3D 200 150- Using Figure 1 on the right that already shows the market demand curve to illustrate the private and social MC curves. Also, point out the private market quantity, the socially optimal quantity, and the social welfare cost. 100 50 0- 1) Using the line drawing tool, illustrate the private marginal cost curve. Label this curve as 'MC'. 400 1200 1600 2000 2400 2800 Output 800 2) Using the line drawing tool, illustrate the social marginal cost curve. Label this curve as 'MSC'. (Hint: to plot this correctly you may first want to plot the socially optimal point 'B' in step 4 below)

The demand for cigarettes is given by Figure 1 P = 550 - 0.2Q. Price 650- Cigarettes are manufactured at a constant marginal cost of 100 and sold in a competitive market. 600- 550 What is the quantity of cigarettes sold in equilibrium? 500 450- Oprivate = 400- 350- If cigarettes generate a marginal external cost of MEC = 0.20Q, what is the socially optimal level of cigarettes? 300 250 Qsocially optimal" %3D 200 150- Using Figure 1 on the right that already shows the market demand curve to illustrate the private and social MC curves. Also, point out the private market quantity, the socially optimal quantity, and the social welfare cost. 100 50 0- 1) Using the line drawing tool, illustrate the private marginal cost curve. Label this curve as 'MC'. 400 1200 1600 2000 2400 2800 Output 800 2) Using the line drawing tool, illustrate the social marginal cost curve. Label this curve as 'MSC'. (Hint: to plot this correctly you may first want to plot the socially optimal point 'B' in step 4 below)

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...

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Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and output. a. Assuming that the production of televisions generates external costs, illustrate the effect of the producers being forced to pay a tax equal to the external costs generated, and indicate the equilibrium output. b. If instead of generating external costs, television production generates external benefits, illustrate the effect of the producers being given a subsidy equal to the external benefits generated, and indicate the equilibrium output.
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