1. If the current market equilibrium price is set at 3$ then what would be the firm's profit-maximizing level of output? What price would the firm charge, and if the firm average total cost is 4$, could the firm raise the price to reduce loss?

2. If we take into consideration that the firm's production imposes an extra cost on society, using a supply and demand diagram how would you demonstrate how this negative externality could lead to market inefficiency? How might the government help to eliminate this inefficiency?

 

Price 2.00 1.00 (a) 100 200 Firm MC Price Quantity 2.00 1.00 Q (b) Supply Q Quantity Market