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5. The demand curve for chocolate can be represented by Q = 1,000-20P, where P is...

5. The demand curve for chocolate can be represented by Q = 1,000-20P, where P is the price per pound (in U.S. dollars), and the quantity Q is expressed in pounds per year. The private marginal cost of production in the chocolate industry is given by Q/20.

a. (4 points) Assuming that the market for chocolate is competitive, what will be the equilibrium outcome? Please include a graph.

b. (10 points) Chocolate production causes a nauseating odor to sweep over the city in the vicinity of chocolate factories, so the social marginal cost of production, taking the odor into account, is Q/5. What is the socially efficient amount of chocolate to produce? What is the Pigovian per-unit tax? Please include a graph.

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