What is consumer surplus and what are firm profits

Reference no: EM133344154

Case: There is a university that wishes to raise revenue. It is approached by Peppy Cola, which offers it $12.50 to be the sole provider of cola products on campus. For all firms that produce cola, the cost of production is $1 per unit. Market demand for cola is Q = 11 - p. This implies the marginal benefit to consumers of an additional unit of cola is 11 - Q

When confronted with the allegation that the university is just taking money from its students, the university points out that cola cans and bottles are bad for the environment. A (reputable) study has found that the negative externality is $5 per unit. Show that the efficient quantity is 5 by maximizing the sum of consumer surplus, firm profits, surplus for the university, and the negative surplus due to the externality. At this efficient quantity, what is consumer surplus? What are firm profits? What is the size of the negative externality? What is total surplus?

Reference no: EM133344154

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