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Analysis Of Equilibrium And Socially Optimal Price And Quantity In a Perfectly Competitive Market With Externalities

This Homework Solution explains equilibrium and externalities in competitive markets. Download now!

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Analysis of Equilibrium and Socially Optimal Price and Quantity in a Perfectly CompetitiveMarket with ExternalitiesConsider the perfectly competitive market for a special type of computer memory chip with thefollowing demand and supplyfunctions:•Demand: Qd=7,000−5PQ_d = 7,000-5P•Supply: Qs=−2,000+10PQ_s =-2,000 + 10PWhere PP represents the price in dollars, and QQ represents the quantity.Each computer chip produced results in a pollution cost of 10 cents per chip. Based on the abovefunctions and the environmental impact:1.Determine the equilibrium price (Pe) and quantity (Qe)in the absence of the external cost.Show the calculations and explain the process.2.Identify the socially optimal price and quantityby considering the pollution cost of $0.10per chip. Explain how the pollution cost affects the market price and quantity, and discusswhether the equilibrium price and quantity remain unchanged or if adjustments are needed.3.Plot the demand and supply curves, indicating both the equilibrium and socially optimalprice and quantity on the graph. Use Excel or any other graphical tool to assist in creating theplot.Word count requirement: 500-600 words. Please ensure all calculations are clearly shown and thereasoning behind each step is well explained.

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Economics

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