3) e-Cigarette manufacturers have the following supply curve (i.e. marginal cost curve): P=MC=2Q, whereQ is measured in millions of e-cigarettes per year. The inverse demand curve is: P=40-8Q.

a) Find the equilibrium price and quantity sold and draw the demand and supply curves with equilibrium price and quantity on the graph (10 points).

b) e-Cigarette manufacturers have been releasing chemicals into the air. The external marginal costs is estimated to be $0.50 per e-cigarette. Show how the externality affects the graph and calculate the socially optimal number of e-cigarettes. (15 points) (Hint: assume there is no demand side externality - the vapor produced from consuming e-cigarettes does not harm third parties)

c) Calculate the deadweight loss from the externality (15 points)