Question

The figure on the right shows the costs and benefits associated with the production of wood pulp. With regulation that achieves an efficient​ outcome, the market produces​ ____ tons of wood pulp at a price of​ ____ per ton.

A.

​5; $1,100

B.

​3; $800

C.

​3; $700

D.

​5; $700

E.

​4; $800

Price (dollars per ton) The figure on the right shows the costs and benefits associated with the production of wood pulp. With regulation that achieves an efficient outcome, the market produces tons of wood pulp at a price of 1,100+. MSC per ton. 1,000 A. 5; $1,100 900 B. 3; $800 800 C. 3; $700 X S=MC D. 5; $700 700 O E. 4; $800 600 D=MB 500 0 2 4 3 5 4 5 Quantity (tons per week)

Answer 1

The following diagram shows the costs and benefits associated with the production of wood pulp.

Price (dollars per ton) 1,100 MSC 1,000 Efficient Outcome 900 E 800 S=MC 700 600 D=MB 500 0 2 3 5 4 5 Quantity (tons per week)

Now, the producer of wood pulp produces where Marginal Cost (MC) and Marginal Benifit (MB) curve intersects. Hence, the producer produces 5 tons of wood pulp at $700 per ton.

But at this production level, there is a negative externality present in the market. This is not the efficient outcome.

Now, With regulation efficient outcome is achieved. The efficient production is at that point where the Marginal Social Cost (MSC) intersects the Marginal Benifit (MB) curve. The efficient outcome is marked as point E in the diagram.

The quantity of wood pulp corresponding to point E is

= 3 tons of wood pulp

And, the price per ton of wood pulp corresponding to point E is

= $800 per ton

The market produces 3 tons of wood pulp at a price of $800 per ton.

We eliminate options (A), (C), (D) and (E) as they do not match our result.

Answer is option (B) i.e. 3, $800.

Hope the solution is clear to you my friend.