Question

An electronics store gives customers the option of purchasing a protection plan when customers buy a new

refrigerator. The customer pays $125 for the plan, and if their refrigerator is damaged or stops working, the


store will replace it for no additional charge. The store knows that 3% of customers who buy this plan end


'up needing a replacement that costs the store $1,500 each.

Answer 1

60 dollars.

Step-by-step explanation:

The answer is on Khan.

Answer 2

When refrigerator manufacturers are mandated to pay for the externality costs of pollution, production becomes costlier, and the supply curve shifts up by $100, reflecting in the new market price. However, the price may not rise by the full amount of the externality due to factors such as elastic demand or producers shouldering some of the costs.

Step-by-step explanation:

The question pertains to the externalities associated with manufacturing refrigerators and how incorporating these external costs into the price changes the market dynamics. If refrigerator manufacturers are required to internalize the external costs of pollution, amounting to $100 per refrigerator, then production costs rise, effectively shifting the entire supply curve upwards by this amount. This change indicates that firms would have to charge more for refrigerators to cover these additional costs. However, there seems to be a discrepancy, as the market price increased by only $50 instead of the full $100 of the externality. This can occur due to several market factors, such as elastic demand, where consumers are sensitive to price changes, or because the producers may absorb part of the cost increase to maintain their competitive status in the market. Hence, the new market price reflects the balance between the additional costs and market reactions to the price increase.