Consider the market for ice cream. Suppose that this market is perfectly competitive. The cost structure of the typical ice cream producer is as follows. Average total cost is equal to 50 ATC(Q) Q +;Q, average variable cost is equal to AVC(Q) = ÷Q, and marginal cost is equal to %3D MC(Q) = Q. Now, , suppose that a new scientific study comes out that shows that soil pollution from rock salt (a key input for making ice cream) is extremely hazardous to human health. In response, the government decides to impose harsh re-zoning restrictions on any land once used for making ice cream. This reduces the market rent for land used to make ice cream, which in turn lowers the opportunity cost of operating an ice cream factory. This reduction in the opportunity cost of capital causes the total fixed cost of ice cream production to fall to 32, but there is no change to variable cost. Give formulas for the typical ice cream producer's new average total cost curve ATC(Q) and marginal cost curve MC(Q).
Consider the market for ice cream. Suppose that this market is perfectly competitive. The cost structure of the typical ice cream producer is as follows. Average total cost is equal to 50 ATC(Q) Q +;Q, average variable cost is equal to AVC(Q) = ÷Q, and marginal cost is equal to %3D MC(Q) = Q. Now, , suppose that a new scientific study comes out that shows that soil pollution from rock salt (a key input for making ice cream) is extremely hazardous to human health. In response, the government decides to impose harsh re-zoning restrictions on any land once used for making ice cream. This reduces the market rent for land used to make ice cream, which in turn lowers the opportunity cost of operating an ice cream factory. This reduction in the opportunity cost of capital causes the total fixed cost of ice cream production to fall to 32, but there is no change to variable cost. Give formulas for the typical ice cream producer's new average total cost curve ATC(Q) and marginal cost curve MC(Q).
Chapter19: Externalities And Public Goods
Section: Chapter Questions
Problem 19.1P: A firm in a perfectly competitive industry has patented a newprocess for making widgets. The new...
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Transcribed Image Text:Consider the market for ice cream. Suppose that this market is perfectly competitive.
The cost structure of the typical ice cream producer is as follows. Average total cost is equal to
50
1
1
ATC(Q)
+÷Q, average variable cost is equal to AVC(Q) =;Q, and marginal cost is equal to
2
MC(Q) = Q.
Now, suppose that a new scientific study comes out that shows that soil pollution from rock salt (a key
input for making ice cream) is extremely hazardous to human health. In response, the government
decides to impose harsh re-zoning restrictions on any land once used for making ice cream. This reduces
the market rent for land used to make ice cream, which in turn lowers the opportunity cost of operating an
ice cream factory. This reduction in the opportunity cost of capital causes the total fixed cost of ice cream
production to fall to 32, but there is no change to variable cost.
Give formulas for the typical ice cream producer's new average total cost curve ATC(Q) and
marginal cost curve MC(Q).
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