Question

1) The growing of mushrooms produces odours that affect the satisfaction of people
who live near the mushroom barns. Suppose the growing of mushrooms imposes
external costs (reduced satisfaction) given by MCE=0.75Q. Demand in the market for
mushrooms is given by P=200-Q and supply is given by MCP=20+2Q

a) What is the equilibrium price and quantity in the market for mushrooms?
Calculate and show on a diagram
b) Identify which areas in your diagram make up Total External Costs at the market
equilibrium and which areas make up Total Private Costs at the market equilibrium.
c) What is the economically efficient quantity and price of mushrooms? And identify
the social loss at the market equilibrium in your diagram.

2) Suppose we have only 3 uses of land outside a city: dairy farms, wheat farms, timber
lots, and mink farms. The rent-distance functions are the following:
Rdairy = 500 – 10 D
Rwheat = 300 – 3 D
Rtimber = 200 – D
Rmink = 100 – 0.5 D
where D is distance in kilometres from the city.

a) Using a graph with D on in horizontal axis and R on the vertical axis, identify how
the uses of land are ordered in proximity to the city.
b) Calculate at what distance from the city the land-use changes from one use to
another, i.e., the intensive margin for each land-use.
c) Draw a diagram of what land-use surrounding this city looks like (e.g., an aerial
view).
d) Suppose a new highway is built leaving the east-end of the city, how do you think
this would affect your diagram in part c) of what the land-use surrounding the
city would look like? Attempt to draw the new diagram

Answer 1