1. A drug is being produced by competitive markets at a constant marginal cost of 10 cents per dose. The demand for the drug is Q= 1,000,000 -10,000P, where Q indicates the number of doses and P is the price per dose in cents.
a. What is the market equilibrium price and quantity? Sketch your answer as well as calculate it numerically.
The companies that produce this product also discharges chemical wastes. The damage to the economy due to the pollution is estimated at 1 cent per dose.
b. An economist testifies that this drug, despite its value to society, is being overproduced. What price and quantity would the economist advocate instead? Sketch your answer. Calculate and illustrate in your graph the dead weight loss of the market equilibrium.
c. The economist suggests that a tax should be place on every dose produced. What size tax per unit of output should be imposed to achieve efficiency?