Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Textbook Question
Chapter 19, Problem 19.1P
A firm in a
a. If the market price is $20 per widget and the firm’s marginalcost is given by
b. Suppose a government study has found that the firm’snew process is polluting the air and estimates the socialmarginal cost of widget production by this firm to be. If the market price is still $20, what is thesocially optimal level of production for the firm? Whatshould be the rate of a government-imposed excise tax tobring about this optimal level of production?
c. Graph your results.
a)
Expert Solution
To determine
To find: The number of widgets produced by the firm.
Explanation of Solution
The profit maximizing situation exists at the level where market price is equal to the marginal cost.
Thus, P = MC
b)
Expert Solution
To determine
To find: The socially optimal level of production and rate of tax.
Explanation of Solution
The socially optimal level exists at, P = SMC
Given SMC = 0.5q
The socially optimal level exists at q = 40 widgets.
So the excise tax, T = 20 − 16 = $4
Thus, $4 tax should be applied to bring the optimal level of production.
c)
Expert Solution
To determine
To find: The graph for the calculated results.
Explanation of Solution
Below graph shows the price and marginal cost on vertical axis while the quantity is on horizontal axis. Moreover, the gap between MC and SMC shows the tax imposed by the government.
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Chapter 19 Solutions
Microeconomic Theory
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