Suppose That Cookie Producers Create a Positive Externality Equal to $2

question 55

Multiple Choice

Suppose that cookie producers create a positive externality equal to $2 per dozen.Further suppose that the government offers a $2 per-dozen subsidy to the producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of cookies to be produced?

• A) The equilibrium quantity is greater than the socially optimal quantity.
• B) The equilibrium quantity is less than the socially optimal quantity.
• C) They are equal.
• D) There is not enough information to answer the question.

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Definitions:

Discount Rate

The interest rate used to discount future cash flows to their present value.

Net Present Value

A financial metric that calculates the value of a series of cash flows by discounting them to their present value, considering the time value of money.

Working Capital

A financial metric representing the difference between a company's current assets and its current liabilities, indicating the short-term financial health and operational efficiency.

Net Operating Income

A financial metric that calculates a company's profit after operating expenses are subtracted from operating revenues.