The demand for cigarettes is given by P 400 0.2Q. Cigarettes are manufactured at a constant marginal cost of 50 and sold in a competitive market. What is the quantity of cigarettes sold in equilibrium? Figure 1 Price 500- 450- 400- 350- 300- 250 200- QPrivate 1750 If cigarettes generate a marginal external cost of MEC = 0.05Q, what is the socially optimal level of cigarettes? QSocially optimal 1400 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. 1) Using the line drawing tool, illustrate the private marginal cost curve. Label this curve as 'MC'. 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) 3) Using the point drawing tool, illustrate the point that represents the profit-maximizing price and quantity. Label this point as 'A' 150 100 50 D 0 400 800 1200 1600 2000 Output

The demand for cigarettes is given by P 400 0.2Q. Cigarettes are manufactured at a constant marginal cost of 50 and sold in a competitive market. What is the quantity of cigarettes sold in equilibrium? Figure 1 Price 500- 450- 400- 350- 300- 250 200- QPrivate 1750 If cigarettes generate a marginal external cost of MEC = 0.05Q, what is the socially optimal level of cigarettes? QSocially optimal 1400 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. 1) Using the line drawing tool, illustrate the private marginal cost curve. Label this curve as 'MC'. 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) 3) Using the point drawing tool, illustrate the point that represents the profit-maximizing price and quantity. Label this point as 'A' 150 100 50 D 0 400 800 1200 1600 2000 Output

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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