AEM_451_HW_4_Solutions - AEM 451/ ECON 409 Suggested...

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AEM 451/ ECON 409 Suggested Solutions for Assignment #4 1) a) TC= (3+r)q^2 (2-e)=q (3+r)(2-e)^2 (3+r)(4-4e+e^2) If r=4, 28-28e+7e^2 If r=0, 12-12e+3e^2 TC versus E -5 0 5 10 15 20 25 30 e 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 r=4 r=0 b) MC(r=4)=-28+14e MS(r=4)=28-14e MC(r=0)=-12+6e MS(r=0)=12-6e E(MS) = (.5)*MS(r=0) + (.5)*MS(r=4) (6-3e)+(14-7e) = 20 – 10e
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c) MD(e) = E[MS(e)] 4e = 20-10e 14e-20 e* = 10/7 E[MS(10/7)] = MD(10/7) = 4*10/7 = 40/7 = fee* (e* and fee* are shown in the graph in part b) d) Here, we want to choose the policy option with the smaller deadweight loss. The DWL from fee-based regulations is B, and the DWL from a marketable permit system is A as shown in the graph below. Note that in order to make proper comparisons about the relative size of B&A, your graph must be correctly scaled; for example, MS should be steeper than MD. In the graph above, both look to have approximately equal slopes, but part of that is because the scale on the graph is distorted. On a graph where MS is steeper than MD, A appears greater than B, which indicates that fee-based systems are more efficient than quantity-based ones. 2)
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AEM_451_HW_4_Solutions - AEM 451/ ECON 409 Suggested...

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