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A firm in a
a. If the market
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)
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)
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)
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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