Question

1 TO M C o Phys zoom urls PHYSICS STATS econ 203 Left:0:59:39 Natalie Gee: Attempt 1 Price Quantity demanded Quantity supplied 700 300 400 100 900 1000 Suppose that the production of good X generates pollution in the form of chemical runoff and that the pollution imposes a S4 cost on society for each gallon of good X produced What is the optimal quantity of good X production? Does the market overproduce or underproduce? 300 - overproduce 700 - underproduce 400 - overproduce 600 - underproduce

Answer 1

The demand and supply curve can be drawn as D and S as shown in the diagram below using the above data. The equation of the inverse demand curve and the inverse supply curve can also be derived from the above data as

p = 8 - 0.01 q (inverse demand) or marginal benefit curve

p = -2 + 0.01 q (inverse supply) or private marginal cost curve

At equilibrium -2 + 0.01 q = 8 - 0.01 q => 0.02 q = 10 =>Q = 500 and p = 8 - 0.01(500) = 3

Hence, actual equilibrium production = 500

However, there is a negative externalities of $4, which will shift the inverse supply curve up by $ 4, i.e., the new supply curve will be p = (-2+4) + 0.01 q, i.e., p = 2 + 0.01 q

With the social marginal cost curve (new supply curve), the optimal output will be determined at the equilibrium point F as shown in he diagram where demand curve intersects the new supply (social marginal cost) curve.

i.e., 2+0.01q = 8-0.01q => 0.02 q = 6 => q = 300 and p = 8 - 0.01(300) = 5

Hence, the optimal output is 300

Since, the actual production is 500 which is greater than the optimal production (300), there is over production of ampunt 500 - 300 = 200.

Therefore, correct answer is 300, overproduction

Price 0 100 200 300 400 700 800 900 1000 1100 500 600 Quantity

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Question 15

The demand for RV vehicle is more elastic than the demand for electricity and hence the deadweight loss in case of RV vehicle would be more with a same level of taxation. When demand and/or supply are elastic, then the deadweight loss of taxation is larger since the quantity varies more proportionately with change in price. For example,for a perfect inelastic curve, there is no deadweight loss.

Hence, the correct option should be: increase - more intensive in market for RV vehicles.

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Question 38

The demand curves Qd = 25 - P/4 and supply curve Qs = P - 40 have been plotted in figure 1 and the demand curves Qd = 40 - P/2 and supply curve Qs = P - 40 have been plotted in figure 2 as follows.

Figure 1 Figure 2. Qd = 4 - (P/2) Qd = 4 - (P/2) Price Price Os =P-40 Qd = 25 - (P/4) 13.3 0 5 10 15 20 30 35 40 45 50 0 5 10 15 20 30 35 40 45 50 25 Quantity 25 Quantity

In figure 1, the equilibrium output is close to midpoint of the demand curve, i.e., corresponding to the mid-point of the demand curve, q = 25/2 = 12.5 and hence the equilibrium output of 12 is close to the midpoint level of output. Hence, the elasticity at the equilibrium is close to 1 since we know that above the mid-point of the demand curve elasticity > 1, at the mid-point it is 1 and below the mid-point, elasticity is less than 1.

On the other hand, in figure 2, the equilibrium is achieved corresponding to the elastic portion of the demand curve. That is the elasticity in case of figure 2 eqilibrium is more than that of figure 1.

As we learnt from the above discussion, the deadweight loss is more in case of higher elasticity. Since, the elasticity is more in case of figure 2, i,e., after taxation, the deadweight loss will increase. Hence, the correct option is:

increase - greater price elasticity of demand.