e130md1_Fall2007A_Answers

e130md1_Fall2007A_Answers - Econ 130 Midterm 1 Version A...

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Unformatted text preview: Econ 130 Midterm 1 Version A Answer Key 2) Find Q*: 100 2Q = Q => Q* = 40 Find Q' (with tax) : 100-2Q = Q + 5 or 95 = 2.5Q => Q' = 38 DWL = (5*(40-38))/2 = 5 3) a) abatement goal: Z = 10 = Z1 + Z2 Efficiency condition: 9Z1 = 6Z2 Solve to get 5/3 Z2 = 10 or Z*2 = 6. Therefore Z*1 = 4. b) current pollution 20 tons each. Socially optimal pollution: firm 1: 20 tons - Z*1 = 16 tons firm 2: 20 tons - Z*2 = 14 tons Allocation of permits is 15 for each firm, so at social optimum firm 2 sells one permit to firm 1. c) MC1 = MC2 = MSC Z1 = 1/9 MSC Z2 = 1/6 MSC Sum quantities: Z = Z1 + Z2 = 1/9 MSC + 1/6 MSC = (15/54) MSC So MSC = 54/15 Z = 3.6Z 4) a) Rewrite in terms of Qs. Q1 = 25 P 0 Q2 = 50 P 0 for 0 P100 for P > 100 for 0 P50 for P > 50 Sum Qs over relevant ranges to get: Q = (25 P) + (50 P) for 0 P50 25 P for 50<P100 0 for P>100 b) plug in P = 80 in relevant range Q = 25 (80) = 25-20 = 5 ...
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