The demand for cigarettes is given by P = 500 -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? Qprivate = 2250 If cigarettes generate a marginal external cost of MEC = 0.05Q, what is the socially optimal level of cigarettes? QSocially optimal = 1800 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

The demand for cigarettes is given by P = 500 -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? Qprivate = 2250 If cigarettes generate a marginal external cost of MEC = 0.05Q, what is the socially optimal level of cigarettes? QSocially optimal = 1800 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

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.

Question

Hand written solutions are strictly prohibited

The demand for cigarettes is given by
P = 500 -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?
Qprivate = 2250
If cigarettes generate a marginal external cost of MEC = 0.05Q, what is the
socially optimal level of cigarettes?
QSocially optimal = 1800
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'.
4) Using the point drawing tool, illustrate the point that represents the socially
optimal price and quantity. Label this point as 'B'.
5) Using the triangle drawing tool, illustrate the social welfare cost of the
externality. Label this area as 'Welfare Cost'.
Carefully follow the instructions above and only draw the required objects.
600-
550-
500-
450-
400-
350-
300-
250-
200-
150-
100-
50-
0-
0
Price
400
800
Figure 1
D
TTTTT
1200 1600 2000 2400 2800
Output
Q
선

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Step 1: Define externality

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Step 3: Find socially optimal quantity

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