A paper manufacturing firm produces 150 units. Its private marginal cost is Rs.30 per unit and it creates an external damage of Rs.8 per unit. What is the total social cost of production?
Answer
Total social cost = Rs.5,700
The correct answer is Total social cost = Rs.5,700 — Add private and external costs: 4,500 + 1,200 = Rs.5,700.
Step-by-step solution
- Calculate private total cost: 30 × 150 = Rs.4,500.
- Calculate external total cost: 8 × 150 = Rs.1,200.
- Add private and external costs: 4,500 + 1,200 = Rs.5,700.
Common mistake: Forgetting to add the external cost to the private cost
Concept tested: Social cost calculation
Published · How this solution was prepared and checked
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