Consider the market for Drug A, which is produced by a price-taking firm that receives a...

Consider the market for Drug A, which is produced by a price-taking firm that receives a price of $100 from the industry market and decides, considering only private costs, to produce a quantity of 200 units. These decisions were guided by the firm’s goal, as always, to maximize its profits.

A government regulatory agency is contacted about significant water pollution that occurs as a result of production of Drug A. The agency examines the market and concludes that the social marginal cost for Drug A is $120 per unit when 200 units are produced. It further concludes that, were social and private costs both considered in making the output decision, 150 units would be produced instead of 200. The government therefore requires the manufacturer to produce 150 units instead.

Answer the following questions:

Draw a graph for the firm described, including all of the above information.
Calculate the reduction in total spending that occurs when the quantity produced changes from the amount the firm originally wanted to produce to the amount recommended by the regulatory agency.
Calculate the reduction in social costs that occurs when the quantity produced changes from the amount the firm originally wanted to produce to the amount recommended by the regulatory agency.

Expert Solution

Rahul Sunny answered 11 months ago

Consider a price-taking firm operating in a market with price, p. The production function for the...

Consider a price-taking firm operating in a market with price, p. The production function for the firm is FK,L=KαLβ. Where K is units of Capital and L is units of Labour. If the cost of each unit of capital is r and the cost of each unit of labour is w. Is the production function homogenous? If so, what is the degree of homogeneity? Under what conditions does the production function exhibit increasing, constant or decreasing returns to scale? Write...

Consider a competitive industry and a price-taking firm that produces in that industry. The market demand...

Consider a competitive industry and a price-taking firm that produces in that industry. The market demand and supply functions are estimated to be: Demand: Qd= 10,000 - 10,000P + 1.0M Supply: Qs= 80,000 + 10,000P - 4,000P1 where Q is quantity, P is the price of the product, M is income, and P1 is the input price. The manager of the perfectly competitive firm uses time-series data to obtain the following forecasted values of M and P1 for 2015: M̂...

In this question, consider the market for a pharmaceutical drug (“A”) that is only produced by...

In this question, consider the market for a pharmaceutical drug (“A”) that is only produced by one manufacturer. a) Suppose that the demand for drug A is perfectly elastic. What is the consumer surplus enjoyed by consumers in this market? Why might a regulatory authority not be concerned about the potential for harm caused by this manufacturer’s position as the sole producer? b) There is only one other drug (“B”), which is made by a different manufacturer, that can be...

Which of the following statements does NOT reflect a price-taking firm? a. If the firm were...

Which of the following statements does NOT reflect a price-taking firm? a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has no incentive to charge less than the going price. c. The firm can sell as much as it wants to sell at the going price. d. Consumers have a major impact on price, not firms.

Consider a firm which sells its product in a perfectly competitive market where the market price...

Consider a firm which sells its product in a perfectly competitive market where the market price is $4.20 per unit. The firms in the market have identical cost structures and is described by the following equations: TC = 40 + 0.1q2(squared) - 0.2q ATC = 40/q + 0.1q- 0.2 MC = 0.2q - 0.2 AVC= 0.1q - 0.2 1.a) What quantity should the firm produce to maximize its profit? 1.b) What is the firm’s profit at its profit-maximizing level of...

Consider a price taking firm that produces a homogeneous, divisible product in an industry characterized by...

Consider a price taking firm that produces a homogeneous, divisible product in an industry characterized by no transaction costs and no barriers to entry/exit. The cost function is given by : C(q)=800+10q +q^2 , Where q is the firm’s output. (a)Find the average variable cost (AVC) and average total cost (ATC). (b)Find the marginal cost function. (c) Suppose the market price for the product (i.e. the price the firm will receive per unit sold) is $40. Will the firm be...

When a firm is a price-taking firm, the price of the product it sells is determined...

When a firm is a price-taking firm, the price of the product it sells is determined by the intersection of the market demand and supply curves for the product. raising the price of the product above the market-determined price will cause sales to fall nearly to zero. many other firms produce a product that is identical to the output produced by the rest of the firms in the industry. all of the above

What is the difference in the supply curves for a price-taking firm and a price-setting firm?...

What is the difference in the supply curves for a price-taking firm and a price-setting firm? Discuss:

Consider a market in which all output is produced by two firms, A and B. The...

Consider a market in which all output is produced by two firms, A and B. The market inverse demand curve is given by where a is 260 and b is 1. Both firms have a constant marginal cost equal to 3. a) Find the Stackelberg equilibrium outputs for firms A and B, the equilibrium market price, and the equilibrium profit for each firm, on the assumption that firm A is the leader and firm B is the follower. b) Repeat...

Consider the following data for the patients taking the drug (Ascorbic Acid). Placebo Drug Sum Cold...

Consider the following data for the patients taking the drug (Ascorbic Acid). Placebo Drug Sum Cold 36 87 123 NoCold 224 333 557 Sum 260 420 680 What is the probability that a patient has No Cold? Is this a marginal or joint probability? a) 0.18 marginal b) 0.62 marginal c) 0.82 marginal d) 0.82 joint e) 0.86 joint Question 15 What is the probability that a patient is taking Placebo and has No Cold? Is this a marginal or...

Question