Question

1.     Suppose you are selling t-shirts at your own t-shirt stand. The supply and demand curves for t-shirts are given below.

P = 5 + 0.1 Q                   P = 34 – 0.2 Q

a.          What is the equilibrium quantity for t-shirt

    

b.           What is the equilibrium price for t-shirts?

    

c.         If the process of making your t-shirts results in chemical waste that you dump in a nearby stream, creating $ 5 worth of damage to the environment per shirt, what is the socially optimal number of t-shirts for you to sell?

    

d.       Given the chemical waste in part c., what is the socially optimal p

    

e.          What tax policy could the government use to assure that you sell the socially optimal number of t-shirts?   

A) Tax t-shirts equal to 5 dollars

B) Subsidize t-shirts equal to 5 dollars

C)Tax t-shirts more than 5 dollars

D) Subsidize t-shirts more than 5 dollars

Answer 1

1.P=5+.1Q

P=34-.2Q

At equilibrium,

5+.1Q=34-.2Q

.3Q=29

Q=96.67

2.P=34-.2(96.67)

P=14.67

3.MC of causing pollution=5

Socially optimal quantity:P=MC

34-.2Q=5

.2Q=29

Q=145

4.P=34-.2(145)

P=5