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(i) The industry ignores the externality.
(ii) The industry produces the socially optimum level of output.
Assume that the market is producing the level of output you identified in (i).
(b) Identify one policy the government might use to achieve the level of output you identified in (ii).
3. Sparkle Car Wash is a profit-maximizing firm with the following production information.
Number of Workers
6 Number of Cars Washed per Day
80 (a) With which worker is marginal product maximized?
(b) Identify and define the economic principle that explains why marginal product eventually decreases.
(c) Explain why Sparkle would never hire the sixth worker.
(d) If Sparkle charges $6 for washing a car, what is the maximum daily wage that Sparkle would be willing
to pay the fourth worker? END OF EXAMINATION Copyright © 2001 by College Entrance Examination Board. All rights reserved.
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