Answer to Question #257655 in Finance for Nguyen

Question #257655

3. You are an industry analyst who specializes in an industry where the market inverse demand is P = 200 − 4Q. The external marginal cost of producing the product is MCExternal = 6Q, and the internal cost is MCInternal = 12Q.a. What is the socially efficient level of output? b. Given these costs and market demand, how much output would a competitive industry produce? c. Given these costs and market demand, how much output would a monopolist produce? d. Discuss actions the government might take to induce firms in this industry to produce the socially efficient level of output.

Expert's answer

A) Socially efficient occurs at the point P = MCE + MCI

300-5Q = 8Q + 14Q

300 = 27Q

Q = 11.11 units

B) A competitive output is where P = MCI

300-5Q = 14Q

300 = 19Q

Q = 15.8 units

C) Monopolist produces at the point MR = MCI

300-10Q = 14Q

300 = 24Q

Q = 12.5 units

D) Impose a tax on production equal to marginal external cost of 8 dollars for every unit of output produced.

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