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1. Suppose the demand for standard household air freshener in the US is

Qd=100- 25P where Qd is monthly quantity demanded in millions and P is the price per unit in dollars and cents. Suppose the marginal private cost (MPC) of producing air freshener is one dollar.

  1. Illustrate in a diagram and calculate the market equilibrium quantity (the supply curve is horizontal).
  2. Explain what a marginal private cost of one dollar means. Does that mean the total cost of producing air freshener is unrelated to how many are produced?
  3. Assume that the marginal private benefit (MPB) of air freshener equals the marginal social benefit (MSB). Explain what that means.
  4. Explain why following the statement is incorrect: "At the equilibrium calculated in part A, every purchaser of air freshener was willing to pay exactly one dollar for the good".

Assume some of the petrochemicals used to produce air freshener are hazardous to the health of those living near the manufacturing plants. Suppose the external (health) cost generated equals forty cents for each air freshener produced.

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