use the accompanying table to answer the following questions. Quantity Private C
ID: 1176305 • Letter: U
Question
use the accompanying table to answer the following questions.
Quantity Private Cost Social Cost Benefit
1 $ 2 $ 4 $12
2 $6 $10 $22
3 $12 $18 $30
4 $20 $28 $36
5 $30 $40 $40
a) What is the external cost per unit of output?
b) What level of output will be produced?
c) What level of output should be produced to achieve economic efficency?
d) What is the value of society pf correcting the externality?
Explanation / Answer
EXTERNAL COST PER UNIT---------MR--------------MC
1----4---------------------------------- - - --------------- -
2----10/2=5--------------------------22-12=10------ 6-2=4
3----18/3=6-------------------------30-22=8---------12-6=6
4---28/4=7--------------------------36-30=6----------20-12=8
5---40/5=8--------------------------40-36=4---------30-20=10
(b) level of output will be produced SHOULD BE WHERE THE DIFFERENCE BETWEEN THE TOTAL PRIVATE COST AND TOTAL BENEFITS IS MAXIMUM (according to the TR and TC approach) so it is maximum at 3 units of production (30-12=18)
(c) level of output should be produced to achieve economic efficency is where MC=MR so it between 3 or 4 units because here MC and MR very close
(d) the value of society pf correcting the externality is equal to the social cost corresponding to each level of production.
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