The demand for t-shirts is Q = 20 ( P/2, where Q is the number of t-shirts
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(a) First, let's figure out the market equilibrium when everyone ignores external costs. Remember that the supply curve is marginal cost above average variable costs. In this case it is the entire marginal cost curve. What is the private supply curve for t-shirts? Use that private supply curve plus the demand curve to find the equilibrium price and quantity. Draw a diagram showing the private supply, demand, and the equilibrium.
(b) Next, add the marginal external costs to your diagram. Then calculate the full-cost supply curve and add that to your diagram. Remember that in this case we first add (marginal) costs, not quantities, since these are the costs associated with each t-shirt. Finally, use the full-cost supply curve and the demand curve to find the efficient price and quantity. Show these on your diagram.
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Related Book For
The Economics Of The Environment
ISBN: 9780321321664
1st Edition
Authors: Peter Berck, Gloria Helfand
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