A firm in China produces computer chips at constant marginal cost MC=10 yuan. However, with each chip produced, the factory emits pollution that costs society 2 yuan.
a. What is the externality (external cost) of producing computer chips? What kinds of costs might the external costs include (be specific)?
b. What is the private marginal cost of producing chips faced by the firm? What is the social marginal cost ?
c. On the axes below, graph the private and social marginal cost curves. Be sure to label each curve clearly. Also indicate the size of the external cost on the graph.
d. Assume that aggregate demand in the economy is given byP= 20-2Q^d . Graph the demand curve on the graph in part (c) above. Label the demand curve clearly.
e. Calculate the equilibrium price and quantity of chips produced. Label the quantity and the price on the graph in part (c).
f. Calculate the efficient price and quantity of chips. Label the quantity and the price on the graph in part (c). Is price higher or lower than quantity ? Why? Is quantity higher or lower than price? Why?
g. Calculate total welfare at equilibrium production, Q^e. You need to calculate an actual number, not just show it on the graph.
h. Calculate total welfare at efficient production, Q*. You need to calculate an actual number, not just show it on the graph.
i. Calculate the size of the deadweight loss incurred for producing at Q^e.
A firm in China produces computer chips at constant marginal cost MC=10 yuan. However, with each chip produced, the factory emits pollution that costs society 2 yuan.
a. What is the externality (external cost) of producing computer chips? What kinds of costs might the external costs include (be specific)?
b. What is the private marginal cost of producing chips faced by the firm? What is the social marginal cost ?
c. On the axes below, graph the private and social marginal cost curves. Be sure to label each curve clearly. Also indicate the size of the external cost on the graph.
d. Assume that aggregate demand in the economy is given byP= 20-2Q^d . Graph the demand curve on the graph in part (c) above. Label the demand curve clearly.
e. Calculate the equilibrium price and quantity of chips produced. Label the quantity and the price on the graph in part (c).
f. Calculate the efficient price and quantity of chips. Label the quantity and the price on the graph in part (c). Is price higher or lower than quantity ? Why? Is quantity higher or lower than price? Why?
g. Calculate total welfare at equilibrium production, Q^e. You need to calculate an actual number, not just show it on the graph.
h. Calculate total welfare at efficient production, Q*. You need to calculate an actual number, not just show it on the graph.
i. Calculate the size of the deadweight loss incurred for producing at Q^e.
