1. The market demand for cigarettes is given by P= 500 – 0.2Q. Cigarettes are manufactured at a constant marginal cost of 50 and sold in a competitive market. (A). What is the quantity of cigarettes sold in equilibrium? (B) If cigarettes generate a marginal external cost of MEC = 0.1Q, what is the socially optimal level of cigarettes?

1. The market demand for cigarettes is given by P= 500 – 0.2Q. Cigarettes are manufactured at a constant marginal cost of 50 and sold in a competitive market. (A). What is the quantity of cigarettes sold in equilibrium? (B) If cigarettes generate a marginal external cost of MEC = 0.1Q, what is the socially optimal level of cigarettes?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter12: Environmental Protection And Negative Externalities

Section: Chapter Questions

Problem 40P: Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in...

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Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Fe and Qe. On the graph, shade in the deadweight loss at the market output.
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