ECON MACRO
5th Edition
ISBN: 9781337000529
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 3, Problem 3.12P
To determine
The problems with letting the market determine the amount of a certain good to be produced if there is an external cost, or negative externality, associated with its production.
Introduction:
Externality is the cost or benefit of a commodity that affects neither the producer nor the consumer but the third party in a transaction. Example of such externalities is the air pollution created by
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The following graph plots daily cost curves for a firm operating in the competitive market for sweatbands.
Hint: Once you have positioned the rectangle on the graph, select a point to observe its coordinates.
Profit or Loss0246810121416182050454035302520151050PRICE (Dollars per sweatband)QUANTITY (Thousands of sweatbands per day)MCATCAVC8, 30
In the short run, given a market price equal to $15 per sweatband, the firm should produce a daily quantity of sweatbands.
On the preceding graph, use the blue rectangle (circle symbols) to fill in the area that represents profit or loss of the firm given the market price of $15 and the quantity of production from your previous answer.
Note: In the following question, enter a positive number regardless of whether the firm earns a profit or incurs a loss.
The rectangular area represents a short-run of
thousand per day for the firm.
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