Question

Units Demanded: Q = 500-40P Total Cost = 300 + Q Price Per Unit = 6 Find: Q, Revenue, and Profit Negative Externality Unit Cost = 2 Recalculate Revenue and Profit if Costs are Internalized and i) passed on to consumers, or they are ii) absorbed by the firm.

Answer 1

A negative externality is a cost that is suffered by a third party as a result of an economic transaction. because it is not absorbedby the firm, it does not affected profits of the firm.

The below are the answers without considering externality cost:

		Value	Formula
A	Price per unit:P	6	Provided
B	Unit Demanded: Q	260	500-40P
C	Total Cost	560	300+Q
D	Total Revenue	1560	B*A
E	Total Profit	1000	D-C

1)If nagative externality is passed on the customers, it is assumed that unit cost of 2 is increased in the price per unit. the required results are provided below:

It should be noted that because Q (units demanded) is a function of price which has changed from 6 to 8 now also changes:

		Value	Formula
A	Price per unit:P	8	Provided
B	Unit Demanded: Q	180	500-40P
C	Total Cost	480	300+Q
D	Total Revenue	1440	B*A
E	Total Profit	960	D-C

B) if the negative externalities are absorbed by the firm the price per unit remains same (i.e. 6) but the formula of cost chages from 300+Q to " 300+ 3Q" where increase in 2q is for externaility abssorbed by the firm:

the required answers are provided below:

		Value	Formula
A	Price per unit:P	6	Provided
B	Unit Demanded: Q	260	500-40P
C	Total Cost	1080	300+3*Q
D	Total Revenue	1560	B*A
E	Total Profit	480	D-C