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The market for toilet paper is characterized by the following inverse demand and supply equations: P...

The market for toilet paper is characterized by the following inverse demand and supply equations: P = 100 – Q P = MC = 2Q – 197.3 where P is the price per roll of toilet paper and Q measures millions of rolls of toilet paper. The external marginal cost is 30 cents for each roll of toilet paper produced. The socially optimal price of toilet paper is _____ cents higher than the price under perfect competition.

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Answer #1

Correct Answer:

30 cents

Working note:

Socially optimal price = external marginal cost + market price

Or

Socially optimal price = 30 cents + market price

Hence, Socially optimal price will be greater by 30 cents.

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