1. If the current market equilibrium price is set at 3$ then what would be the firm's profit-maximizing level of output? What price would the firm charge, and if the firm average total cost is 4$, could the firm raise the price to reduce loss?

2. If we take into consideration that the firm's production imposes an extra cost on society, using a supply and demand diagram how would you demonstrate how this negative externality could lead to market inefficiency? How might the government help to eliminate this inefficiency?

 

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Price 2.00 1.00 (a) 100 200 Firm MC Price Quantity 2.00 1.00 Q₁ (b) Supply Q₂ Quantity Market Price 2.00 1.00 (a) 100 200 Firm MC Price Quantity 2.00 1.00 Q₁ (b) Supply Q₂ Quantity Market

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1 The firms profitmaximizing level of output would be the quantity at which marginal cost equals mar... View the full answer