Question
A firm in a perfectly competitive industry has patented a new process for making infrared digital thermometer. The new process lowers the firm's average cost,
A firm in a perfectly competitive industry has patented a new process for making infrared
digital thermometer. The new process lowers the firm's average cost, meaning that this firm
alone (although still a price taker) can earn real economic profits in the long run.
(a) If the market price is $20 per thermometer and the firm's marginal cost is given by
MCp = 0,4q
where q is the daily widget production for the firm, how many widgets will the firm
produce?
(b) Suppose a government study has found that the firm's new process is polluting the air and
estimates the social marginal cost of thermometer production by this firm to be
MCs = 0,5q.
If the market price is still $20, what is the socially optimal level of production for the firm?
(c) What should be the rate of a government-imposed excise tax to bring about this optimal
level of production?
(d) Graph your results
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