What is the equilibrium price (i.e. the point where willingness to pay equals marginal cost)?
What is the equilibrium price (i.e. the point where willingness to pay equals marginal cost)?
a. Cigarette smoke leads to negative externalities: social costs of smoking include the effects of s Show more a. Cigarette smoke leads to negative externalities: social costs of smoking include the effects of secondhand smoke and increased health care costs. Using the table below plot the marginal benefit (willingness to pay) and private marginal cost curves on a graph. Quantity Marginal benefit of cigarettes Private Marginal Cost of Cigarettes Private + Social Mariginal Cost of Cigarettes 1000 $ 11.00 $ 3.00 2000 $ 10.00 $ 4.00 3000 $ 9.00 $ 5.00 4000 $ 8.00 $ 6.00 5000 $ 7.00 $ 7.00 6000 $ 6.00 $ 8.00 7000 $ 5.00 $ 9.00 b. If you assume that firms do not incorporate the marginal social costs of smoking into account what is the equilibrium number of cigarettes in this market? What is the equilibrium price (i.e. the point where willingness to pay equals marginal cost)? Explain in a sentence how you arrived at your answer. c. Assume that smoking has an additional marginal social cost of $2.00 per 1000 cigarettes sold. Fill in the last column with this new information and graph the new curve on the same graph you produced in part a. What is the new equilibrium amount of smoking? Explain in a sentence. d. How might a society attempt to force firms to incorporate the social costs of smoking in order to obtain the equilibrium you found in part c? Explain in 1-2 sentences. Show less
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