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Suppose the market for dry cleaning has an inverse demand of P = 12 - 0
Suppose the market for dry cleaning has an inverse demand of P = 12 - 0.10Q
and an inverse supply curve (MC) of P = 0.10Q,
where P is the price per article of clothing and Q is the quantity of clothing laundered.
Suppose the external marginal cost of dry cleaning is $0.80.
To correct the market inefficiency, the government could set a quota on the number of laundered pieces of clothing equal to:
a. 56.
b. 22.
c. 102.
d. 88.
Expert Solution
To correct market inefficiency, government should set quota where marginal social benefit (MSB) equals the marginal social cost (MSC). Marginal social cost is the marginal private cost plus external cost.
MSC=MPC+EMSC=0.10Q+0.80MSC=MPC+EMSC=0.10Q+0.80
Equate marginal social benefit with marginal social cost and solve for efficient output:
MSC=MSB12−0.10Q=0.10Q+0.8011.2=0.2QQ=56units.MSC=MSB12−0.10Q=0.10Q+0.8011.2=0.2QQ=56units.
Therefore, the correct answer is A.
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