EEP101/ECON125 Spring
01
Prof.: D. Zilberman
GSIs: Just/Marceau/StPierre
Problem Set 1: due Thursday, February 15, 2001, in class
(Late assignments will not be graded.)
Part A: Numerical Problems
1.
We have a market where the market (inverse) demand function is given by P = 170  2Q, where P is the
price in dollars and Q is the total quantity demanded. The marginal cost of production (MPC) is given by
MPC = 20 + Q and the marginal external cost (MEC) is given by MEC = 20 + 3Q.
a)
Determine the socially optimal level of output (Q*). Calculate the total external cost (TEC*),
consumer surplus (CS*), producer surplus (PS*) and social welfare (W*) at this level of output.
b)
Determine the price a monopolist is likely to charge (P
m
) and the resulting quantity demanded (Q
m
).
Calculate the consumer surplus (CS
m
), producer surplus (PS
m
), and total external cost (TEC
m
) under
monopoly. What is the deadweight loss (DWL
m
) in this case?
c)
The government wants to fix the externality problem using a price mechanism. What is the optimal
level of the tax/subsidy? (Which one is it?) Explain and draw a graph to illustrate your answer.
d)
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 Fall '08
 Zilberman
 Economics, Monopoly, Supply And Demand, producer, MEC, total external cost

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