Suppose the Market for Dry Cleaning Has an Inverse Demand

question 110

Multiple Choice

Suppose the market for dry cleaning has an inverse demand of P = 10 - 0.15Q and an inverse supply curve (MC) of P = 0.05Q, where P is the price per article of clothing and Q is the quantity of clothing laundered. Suppose the external marginal cost of dry cleaning is $1. If the government tries to correct the negative externality by placing a $1 tax on each laundered piece of clothing, buyers will pay _____ and sellers will receive _____, net of the tax.

• A) $3; $2
• B) $4.75; $5.75
• C) $5; $4
• D) $3.25; $2.25

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Definitions:

Colluder

An entity that engages in collusion, cooperating with others secretly or illegally to deceive or defraud.

Degree Of Oligopolization

The extent to which a market or industry is dominated by a few large companies, limiting competition.

Collusion

An agreement between competing firms to control prices or exclude entry of a new competitor in the market, often in secret, to reduce competition and increase profitability.

Cutthroat Competition

An intense form of competition in a market where competitors aggressively undercut each other's prices or use other aggressive tactics to gain market share.