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Unformatted text preview: MSC = MC + MEC = 2 + 0.2Q + 0.05Q = 2 + 0.25Q At the efficient level of production, MSC = P 2 + 0.25Q = 10  0.25Q Q * = (102)/0.5 = 16 The efficient selling price P * = 10  0.25(16) = $6 per package. c. Find the tax rate that must be imposed on the production of the fruit packages so that the aftertax profitmaximizing output level is equal to the efficient level. Also determine the cost to society (deadweight loss) caused by the firms producing at the profitmaximizing rates. The tax rate that must be imposed to obtain the profitmaximizing solution as the efficient solution t * = MEC(Q * ) = 0.05* 16 = $0.8 per package. The deadweight loss DWL = 0.5 (MSC(Q m ) P m )(Q m Q * ) = 0.5(6.44 5.55)1.77 = 0.79. d. Illustrate your results from (a), (b) and (c) in a diagram. MSC = MC + MEC MC D $ Fruit Packets (Q in 6.0 5.55 16 17.77 2 MEC =0.05Q 10 40 t * DWL...
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This note was uploaded on 05/11/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at The University of British Columbia.
 Winter '09
 RATNA

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