# Chapter 1. Figure It Out 17.1

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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.

### Question

a. Find the equilibrium market price and quantity sold.

The equilibrium quantity is h4XZagboIgc= million reams.

The equilibrium price is \$ /NVmPpEmK1w= .

The equilibrium quantity can be found by setting (inverse) supply equal to (inverse) demand: 2Q = 40 – 8Q. Solving for Q yields Q = 4; plugging that quantity, 4, back into either demand or supply yields P = \$8. For further review see section “Market Equilibrium” and section “Externalities”.

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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.

### Question

b. Calculate the socially optimal level of output and price for the paper industry.

The socially optimal quantity is ag2IzDnfzp4= million reams.

The socially optimal price is \$ DC80jhcraSgsKxp3z69Oww==

The socially optimal quantity can be found by equating social marginal cost (including both private and external cost) to (inverse) demand: 2Q + 0.50 = 40 – 8Q. Solving for Q yields Q = 3.95; plugging that quantity, 3.95, back into either demand or supply yields P = \$8.40. For further review see section “Externalities”.