A number of competing bakeries in a trendy downtown neighborhood produce fresh cookies. The demand for cookies
Question:
A number of competing bakeries in a trendy downtown neighborhood produce fresh cookies. The demand for cookies in that neighborhood is P = 16 – 0.25Q, where Q is the dozens of cookies baked each day. The industry marginal cost for these competing bakeries is MC = 2 + 0.25Q.
a. Solve for the equilibrium price and quantity of cookies in the neighborhood.
b. Who doesn’t love the smell of fresh-baked cookies? Downtown residents and passersby receive $2 worth of benefit from every dozen of cookies baked. Show that bakers are producing fewer cookies than is socially desirable. Then show that cookies are underpriced.
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Step by Step Answer:
a To find the equilibrium price and quantity simply equate inverse demand and supply marginal cost T...View the full answer
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Related Book For 
Microeconomics
ISBN: 9781319105563
3rd Edition
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson
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