Suppose the demand for five-hundred-sheet packages of copier paper in the US is Qd=150-10P where Qd is monthly quantity demanded in millions and P is the price per package in dollars and cents.

A.   Suppose MPC=2.9Qs, where Qs is millions of packages of paper supplied.  Interpret the MPC relationship.

B.   Calculate the market equilibrium.

C.  At the equilibrium calculated in part B, how much did it cost the marginal firm to produce the last package transacted?  How much was the marginal consumer willing to pay for the paper?

D.  Explain: if MPB ≠ MSB or MPC ≠ MSC then the market equilibrium calculated in part B is socially inefficient.  What is meant by social efficiency?

Assume the use of waterways by paper producing firms kills fish.  The dead fish represents an external cost equal to $2 for every package of paper produced.

E.   Illustrate and calculate the efficient allocation of paper.  Explain why the market misallocates resources if external costs exist.

F.   The production of paper involves the use of trees that otherwise would have been used to produce houses and boats.  Why do we consider dead fish in the example an external cost of paper production but not foregone houses and boats?