SIMON FRASER ECON290 Tut3

SIMON FRASER ECON290 Tut3 - 3. Adam and Brett are the only...

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Econ 290: Tutorial #3 1. Chapter 3: Problem 1 2. Junjie has two kids: Danny and Jessica. The very first thing Jessica does every morning is to watch her favorite TV programs. Her benefits from watching TV are given by MPB = 200 - 4M, where M is the amount of TV time (in minutes). Jessica’s MPC of watching TV is zero. Danny is a kindergartener, and needs to get ready for school before 8:30. The only problem is that if the TV is on, he gets distracted and needs longer time to get ready. The externality can be captured by the following marginal external cost function: MEC = 6M. Let’s assume Danny gets no benefits from watching TV. (a) What is Jessica’s preferred amount of TV time? (b) What is the efficient amount of TV time? (c) Now assume Jessica has the rights to watch TV, and they can engage in costless bargaining. Without doing any calculation, how long will Jessica watch TV in equilibrium? Why?
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Unformatted text preview: 3. Adam and Brett are the only residents of a small island. Adam operates a papermill, and has costs given by MPC = 10+2Q. Adam gets a price of 24 for each unit of paper he sells. Brett hates the pollution that the mill produces, and has damages given by MEC = Q + 2. (a) Assume that property rights to the environment are established, and Adam has them. Further, assume that Adam and Brett can engage in costless bargaining. What will Adams production level Q* be in equilibrium? (b) Continue from part (a). What is the minimum amount Brett would have to pay for Adam to produce at Q*? What is the maximum amount Brett would be willing to pay for Adam to produce at Q*? (c) If Brett had the property rights, what is the minimum payment Adam would have to make to produce at Q*? What is the most he would be willing to pay?...
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