Assume that notebook paper is sold in a perfectly competitive industry. The industry short-run supply curve (or marginal cost curve) is P = MC = 2Q, where Q is measured in millions of reams per year. The inverse demand for notebook paper is P = 40 – 8Q.
a. Find the equilibrium market price and quantity sold.
The equilibrium quantity is million reams.
The equilibrium price is $ .
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Suppose that, in their production processes, paper manufacturers have been dumping waste in nearby streams. The external marginal cost is estimated to be $0.50 for each ream produced.
b. Calculate the socially optimal level of output and price for the paper industry.
The socially optimal quantity is million reams.
The socially optimal price is $
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