HW7_Solutions_Problem_Set

# HW7_Solutions_Problem_Set - AEM 250 Fall 2008 HW#7...

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AEM 250, Fall 2008 HW #7 Solutions 1. (Harris p. 104, #1) The graph below shows the supply and demand curve in the current generation without any consideration for the future. We can solve for the equilibrium price by setting Q d =Q s : 200 – 5P = 5P 200 = 10P 20 = P So, the equilibrium price is \$20 per unit. Substituting this price back into either the supply or demand curve equation solves for a market quantity of 100 units of oil. At any quantity the net benefit is equal to the distance between the demand curve (the willingness to pay) and the supply curve (the marginal costs). We can express this algebraically as the difference between the price on the demand curve and the price on the supply curve: MNB = (40 - 0.2Q) - (0.2Q) MNB = 40 - 0.4Q We can express this graphically in the graph below. Marginal net benefits of consumption are positive until we reach the equilibrium quantity of 100 units.

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2. (Harris p. 104, #2) To calculate the marginal net benefit function in the second generation, we apply a discount factor of four.
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