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

MC^p = 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

MC^s = 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