Suppose you are selling t-shirts at your own t-shirt stand. The supply and deman

Question

Suppose you are selling t-shirts at your own t-shirt stand. The supply and demand curves for t-shirts are given below.

P = 5 + 0.15Q P = 30 - 0.1Q

a.) What are the equilibrium price and quantity for t-shirts?

b.) If the process of making your t-shirts results in chemical waste that you dump in a nearby stream, creating $5 worth of damage to the environment per shirt, what is the socially optimal number of t-shirts for you to sell, and what is the socially optimal price?

c.) What tax policy could the government use to assure that you sell the socially optimal number of t-shirts?

Explanation / Answer

a) Market is in equilibrium where demand is equal to supply

5+0.15Q = 30-0.1Q

25 = 0.25Q

Q = 100 units

P = 5+0.15Q = 20

b) New supply curve will be 25-0.1Q

5+0.15Q = 25-0.1Q

20 = 0.25Q

Q = 80 units

P = 5 +0.1(80) = $13

c) Government should levy a tax on sale of t shirts.

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