HW1,Sp2001 - EEP101/ECON125 Spring 01 Prof.: D. Zilberman...

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EEP101/ECON125 Spring 01 Prof.: D. Zilberman GSIs: Just/Marceau/St-Pierre 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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HW1,Sp2001 - EEP101/ECON125 Spring 01 Prof.: D. Zilberman...

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