ECON101 University of California Ch 2 to 8 Economics Questions

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Here is a homework assignment for my upper economic class. Econ 145

Homework #1: Chapters 2 – 8


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Econ 145 Homework #1: Chapters 2 – 8 Instructions: Please answer all questions on a separate piece of paper. Every page of your homework must have your name and student ID written on it. Homework should be stapled together with a single staple at the top left corner. You may type or hand-write your response. Please circle your answer for each problem so that I can find your answer. I will not search through your work… if I am not sure where you’ve ended the problem it will just be counted wrong. Ch 2: 1. Suppose Q D = 200 – 4P and Q S = 100 describe market demand and market supply in a given market. a. Find the equilibrium price and quantity for this market. b. Graph both supply and demand for this market. c. Compute the consumer and producer surplus for this market. d. Give an example of a good in the real world that might be described by this graph. 2. Suppose the market for organically grown wheat is modeled through the following market supply and demand functions: 𝑃 = 10 + .5𝑄𝑠 𝑃 = 22 − 2.5𝑄𝑑 a. Algebraically find the equilibrium price and quantity for this market. b. Draw a graph of the supply and demand in this market, and shade in the areas corresponding to consumer and producer surplus. c. Determine the value of consumer and producer surplus at equilibrium. 3. The market for bottled water can be described with supply and demand functions as follows 𝑄𝑑 = −100𝑃 + 1150 𝑄𝑠 = 400𝑃 − 100 a. Algebraically find the equilibrium price and quantity for this market. Now suppose that an investigative journalist discovers that companies were bottling tap water and selling it at a huge markup. The government passes a law prohibiting companies from bottling tap water, and the supply of bottled water changes to: 𝑄𝑠 = 400𝑃 − 350 b. Algebraically find the new equilibrium price and quantity for this market. c. Draw a graph of the supply and demand in this market before and after the government regulation went into effect. d. Compute the change in consumer and producer surplus due to the new law. e. Bonus: What is the effect on consumer welfare if everybody who decides not to buy a bottle of water at the new price instead gets a glass of tap water (Price: $0.00)? Ch 3: 1. Use economic analysis to evaluate the following statement: “The only amount of acceptable pollution is no pollution at all.” a. Why would an economist disagree with this statement? b. Give an example where this statement is true. c. Give an example where this statement is false. 2. A chemical pesticide producer releases wastes into the Ohio River. Because the negative effects are not captured by the private market, there is a market failure, which is illustrated by the following functions, where Q is the amount of liquid chemical pesticides in thousands of barrels, and P is the price per barrel: 𝑀𝑆𝐵 = 70 ‒ 0.1𝑄 𝑀𝑃𝐶 = 10 + 0.4𝑄 𝑀𝐸𝐶 = 0.1𝑄 a. Find the competitive equilibrium and the level of Mπ at that point. b. Find the efficient equilibrium and the Mπ function at that point. 3. Assume that a small town uses a referendum to overcome the free-rider problem and determine how its residents might value a new water filtration system for its public water supply. The voting results are aggregated by the town’s two districts, yielding the following demand estimates: 𝐷1: 𝑄 = 160 − 20𝑃1 𝐷2: 𝑄 = 60 − 5𝑃2 (Where Q is the expected percent of copper to be filtered by the system, and P is the price in millions of dollars. A value of Q = 5 implies that five percent of copper is removed from the drinking water.) a. Based on these estimates, determine the town’s market demand for this public good. b. If the market supply for the system were 𝑃 = 6 + 0.15𝑄, what would be the equilibrium price and quantity of abatement for the town? 4. A New Hampshire textile mill releases pollution into nearby wetlands, and the associated health and ecological damages are not considered in the private market. Suppose you are an environmental economist working with the following marginal benefits and costs for this market, where Q is thousands of pounds and P is price per pound. 𝑀𝑃𝐵 = 800 − 0.5𝑄 𝑀𝐸𝐵 = 0 𝑀𝑃𝐶 = 20 + 0.3𝑄 𝑀𝐸𝐶 = 0.4𝑄 a. Find the competitive equilibrium 𝑄𝑐 and 𝑃𝑐 and the efficient equilibrium 𝑄𝐸 and 𝑃𝐸 . b. Suppose the textile mill owned the rights to the wetlands, and it is negotiating with a private environmental group that is willing to pay the mill to produce less output. For the 800th unit of output, determine the range within which a payment would be acceptable to both parties. c. Give an example of an obstacle that might explain why this kind of negotiation is rare in real life. d. Bonus: Compute the minimum and maximum payments required to reduce the Factory’s output to the efficient level of output. (I recommend excel.) Ch 4: 1. One of the major problems in applying the Coase Theorem in practice is the existence of high transaction costs. Propose an approach that a third party could use that would reduce these costs sufficiently so that bargaining could proceed. How likely is the solution to be efficient, and why? 2. Graph a pollution abatement market where the allocatively efficient level of abatement occurs at 100 percent (i.e. pollution is zero) a. Referring to your graph, explain this outcome intuitively. 3. Suppose that the state of Connecticut is attempting to set a water quality standard, where water quality is measured as the percent of mercury abated (A), and the marginal social benefit (MSB) and marginal social cost (MSC) of abatement have been estimated as follows 𝑀𝑆𝐵 = 40 − 0.1𝐴 𝑀𝑆𝐶 = 36 + 0.025𝐴 The state’s department of environmental protection sets the standard at 20 percent. Is this standard set efficiently, too stringently, or too leniently? Explain briefly. 4. Assume that two power plants, Firm 1 and Firm 2, release sulfur dioxide (𝑆𝑂2) in a small urban community that exceeds the emissions standard. To meet the standard, 30 units of 𝑆𝑂2 must be abated in total. The two firms face the following abatement costs 𝑀𝐴𝐶1 = 16 + 0.5𝐴1 𝑀𝐴𝐶2 = 10 + 2.5𝐴2 , where costs are measured in thousands of dollars. a. Prove that a uniform standard will not meet the cost-effectiveness criterion. b. Determine how the abatement levels should be reallocated across the two firms to minimize costs. c. . Ch 5: 1. Suppose that a chemical manufacturing plant is releasing nitrogen oxides into the air. These emissions are associated with health and ecological damages. Economists have estimated the following marginal costs and benefits for the chemical market, where Q is monthly output in thousands of pounds and P is price per pound. 𝑀𝑆𝐵 = 50 − 0.4𝑄 𝑀𝑆𝐶 = 2 + 0.4𝑄 𝑀𝐸𝐵 = 0 𝑀𝐸𝐶 = 0.2𝑄 a. Find the competitive equilibrium𝑄𝑐 and 𝑃𝑐 and the efficient equilibrium 𝑄𝐸 and 𝑃𝐸 . b. Find the dollar value of a product charge that would achieve an efficient solution. 2. In 1996, Michigan launched a voluntary emissions trading program, which allows polluters to achieve cost-effective solutions when meeting requirements of the U.S. Clean Air Act. Suppose that Michigan’s objective for two major firms in an urban area is a 16 percent reduction in carbon monoxide emissions and that each firm faces the following costs: Firm 1: Firm 2: 2 𝑇𝐴𝐶1 = 1000 + 2.5(𝐴1 ) 𝑇𝐴𝐶2 = 500 + 1.5(𝐴2 )2 𝑀𝐴𝐶1 = 5𝐴1 𝑀𝐴𝐶2 = 3𝐴2 a. b. c. d. 𝐴1 and 𝐴2 represent the percentages of CO emission abatement achieved by firm 1 and 2, respectively, and TAC and MAC are measured in thousands of dollars. Calculate the TAC and MAC for each firm if a uniform abatement standard were used. Based on your answer to part (a), do the two firms have an economic incentive to participate in the trading program? Explain. Quantify the cost savings associated with a cost-effective abatement allocation that could be achieved through trading. At what price must each tradable permit be set to achieve the cost-effective solution? Ch 6: 1. Comment on the following statement: “Without exposure, there is no risk.” 2. Give two real world examples of how government has provided public information to enhance the identification of a voluntary risk. 3. Consider a pollutant, Z. a. Describe what an RfD of 0.002 means. b. Sketch a dose-response function for pollutant Z, assuming that the dose-response relationship increases at a decreasing rate throughout. Label the RfD on your diagram. 4. Suppose a dose-response function has been estimated to be 𝑅 = −0.2 + 1.6𝐷, where D is emissions of sulfur dioxide in parts per million (ppm) and R is the response measured as a percent of agricultural crop decline. Determine if there is a threshold, and if so, what is the threshold? If there is none, explain how you know. 5. What is a hazard quotient, and how is it used in risk assessment? 6. Suppose you are using risk-benefit analysis to evaluate a policy aimed at limiting the use of a pesticide applied to grain crops. Describe the risks and benefits that would have to be estimated to conduct this analysis properly. Ch 7: 1. Is it possible for an individual’s valuation of an environmental commodity to include both user value and existence value? Explain briefly. 2. Suppose the federal government is considering an air quality policy initiative that would effectively increase abatement (A) of ozone from 10 percent to 20 percent and that the marginal social benefit (MSB) of ozone abatement in millions of dollars has been estimated as 𝑀𝑆𝐵 = 120 − 2.5𝐴. Determine the dollar value of incremental benefits associated with this initiative. 3. In response to acid rain damage to Chesapeake Bay, a collaborative federal and state program has been proposed. You have been hired to evaluate the benefits of the plan as part of a formal benefit-cost analysis. Use the travel cost method (TCM) to accomplish this goal, based upon a $20 admission fee and the following pre-and post-policy recreational demand functions: (𝑃𝑟𝑒 − 𝑃𝑜𝑙𝑖𝑐𝑦) 𝑃 = 72 − 0.02𝑉0 (𝑃𝑜𝑠𝑡 − 𝑃𝑜𝑙𝑖𝑐𝑦) 𝑃 = 90 − 0.05𝑉1 V is the number of visitors in thousands and P is the admission fee. a. Graph the demand both before and after the policy is put into place. b. Shade the area on the graph corresponding to the benefits of the plan. c. Compute the area of the shaded region on the graph (report your answer in dollars). 4. Contrast the averting expenditure method (AEM) with the travel cost method (TCM) and list at least one strength and one weakness for each. 5. One of the strengths of the contingent valuation method (CVM) is its ability to capture existence value. How can the researcher take advantage of this, yet avoid some of the biases of such a survey-based approach? Ch 8: 1. Of the two approaches to cost estimation, which in your view likely produces the most reliable estimates? Explain. 2. Suppose the MSC of cleaning Puget Sound is modeled as MSC = 10 + 1.4A, where A is the percentage of phosphorus abated, and MSC is measured in millions of dollars. a. Find the incremental costs of a policy initiative that increases the phosphorus abatement level from its baseline of 30 percent to 45 percent. b. Graphically illustrate using the MSC function, labeling clearly where incremental costs are shown. c. Repeat part (b) using the TSC function directly. 3. Suppose the TSC of mercury abatement has been estimated as 𝑇𝑆𝐶 = 20𝐴 + 2.4𝐴2 , where A is a percentage of mercury abatement, and TSC is in millions of dollars. a. Find the incremental cost of a statewide policy that would increase abatement from 5 to 10 percent b. Graphically illustrate using the TSC function. 4. Assume you are responsible for assessing whether the air quality standard for carbon monoxide (CO) is set at the efficient level for some region. To accomplish this task, you have estimated the following marginal benefit and marginal cost functions for CO abatement: 𝑀𝑆𝐵 = 20 − .25𝐴 𝑀𝐶𝐸 = 2 + 0.1𝐴 𝑀𝐴𝐶𝑚𝑘𝑡 = 6 + 0.25𝐴 A is the percentage of CO abatement, and MSB, MAC mkt and MCE are measured in millions of dollars. a. Find the MSC of abatement function. b. Solve for the efficient level of abatement, and illustrate graphically. c. Show the importance of the MCE by determining the effect on the solution if these government costs were ignored. Support your answer algebraically and graphically.
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Explanation & Answer

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Chapter 2:
1)
a) Equilibrium price is where QD = QS, so 200-4P=100, hence P=25

b)
c) consumer surplus = (50-25)*100*1/2 = 1250, producer surplus =
25*100=2500
d) This graph could explain the market for apartments in the short-run.
2)
a) The quantity demanded and the quantity supplied will be equal in equilibrium,
hence 10 + 0.5Q= 22 – 2.5Q, therefore Q=4, and the price is P=10 + 0.5 * 4 = 12.

b)
c) Consumer surplus = (22-12)*4*1/2=20, producer surplus = (12-10)*4*1/2=4
3)
a) Qd = Qs, so -100P+1150=400P-100, hence P=2.5 and thus Qe=400*2.5-100=900
b) -100P+1150=400P-350, hence P=3 and Qe=850

c)
d) Cs before = (11.5-0.25)*900*1/2=5062.5, Ps before = 0.25*900*1/2=112.5
Cs after = (11.5-7/8)*850*1/2=4515.625, change = -546.875, Ps after =
(7/8)*850*1/2=371.875, change = +259.375, total welfare change=-287.5
e) The consumer welfare for the market will remain unchanged as the market is
concerned just with the bottled water market and tap water may have different
utility to customers.
Chapter 3
1)
a) No not necessarily, an economist would argue that the optimal level is when the
marginal social benefit of pollution is equal to the marginal social cost of
pollution.
b) This would be true for pollution which has an infinite social cost, e.g. it is lethal
to humans and is uncontrollable, which could be explained by say volcanic
eruptions.
c) This statement is false for example with pollution from car usage as the pollution
from cars can be quantified as a cost and the benefit one gets from a car can be
compared to that value.
2)

a)

b)
3)
a) P= P1 + P2, (P1 and P2 are the inverses of the quantity functions), which is thus P
= 8+12-(0.05Q+0.2Q) thus P = 20 – 0.25Q
b) We must equate both the price functions, so 6+0.15Q=20-0.25Q, hence Qe=35
and Pe=20-0.25*35=11.25 million
4)
a) Competitive equilibrium: MPB equals MPC, hence 800-0.5Q=20+0.3Q, thus
Qc=975 and Pc=$312.50. Efficient equilibrium: MSB = MSC, hence 800-0.5Q=20 +
0.7Q, thus Qe= 650 and Pe=$475
b) Acceptable payment, p, needs to be larger than the marginal profit which will be
l...


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