1. You work as a data analyst for Strawble, a paper straw company in Western Massachusetts. The firm has recently re-tooled an old paper mill on the Connecticut River to produce paper straws. As the data analyst for the firm, your boss would like you to determine how many paper straws to produce in a year and what price to charge for them. Follow these steps to determine your firm's optimal production and pricing decisions.

P Q

3.07 42.796

2.75 49.193

3.28 40.651

2.22 56.829

3.31 41.301

3.41 36.892

2.66 48.959

3.20 38.678

3.00 44.655

3.19 42.527

3.32 37.919

3.18 45.860

2.04 58.410

3.03 44.770

3.64 32.909

2.75 48.321

2.80 45.140

2.14 57.703

3.14 47.740

2.91 43.638

3.00 53.532

3.09 39.099

2.29 52.788

3.17 44.178

2.40 54.867

(a) First, determine the demand for your product. Your firm has been experimenting with different prices in some test markets.

Variable Description

Price: Price (in $ per box) for a box of 100 paper straws

Quantity: Quantity (in 1000s) of boxes sold at that price

Use regression analysis in Excel to estimate a demand function of the form Q = a + bP. What is your demand function? (Note that quantity is reported in 1000s of boxes. You can keep the same units and report your demand function in 1000s of boxes.)

(b) Your firm can produce a box of paper straws at a constant marginal cost of $3 per box. If your firm behaves competitivelythat is, it does not try to manipulate the market-clearing pricewhat price should it charge for a box of paper straws?

(c) How many boxes of paper straws should your firm produce in order to satisfy demand at that price?

2. You work as a state regulator who oversees the paper industry, and you are examining the production of paper straws. Determine if the above pricing and production decisions yield the socially optimal market equilibrium, or if you should impose regulations on this firm.

(a) What "rule of thumb" can you use to determine the socially optimal market outcome?

(b) What is the socially optimal price and quantity of paper straws for this firm? That is, at what price and quantity is this rule satisfied and the market clears?

(c) Does the firm privately achieve the socially optimal outcome, or does this market suffer from a market failure? Briefly explain your answer. (For now, assume no externalities, etc.) (

d)How much profit does the firm earn? How much consumer surplus is generated by this market? What is the total economic value (or welfare or surplus) generated by this market?