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# PART II Midterm answers - 1 PART II ANALYTICAL PROBLEMS(50...

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1 TYPE B PART II: ANALYTICAL PROBLEMS (50 points) 1. ( 15 points ) Consider oil exploration in Nigeria. Nigerians are facing health problems associated to water pollution caused by oil drilling activities. The demand for oil is: Q d =50 – P. The supply is: MPC=10+ Q s (MPC are marginal private costs). The society performed a health study, and found that the external costs associated to pollution are: MEC = 2Q s (MEC are marginal external costs) a) Estimate the competitive price and quantity in equilibrium when external costs are not included. P = 30, Q = 20 b) Estimate the competitive price and quantity in equilibrium when external costs are taken into account. P = 40, Q = 10 c) Show the results of (a) and (b) in a figure. 2. ( 10 points ) An investor is offered a share in a gold mine that is expected to yield \$1000 per year for four years, at an initial cost of \$3000. The discount rate is 11%. Should she invest in this gold mine? Use the NPV criteria to find an answer.

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PART II Midterm answers - 1 PART II ANALYTICAL PROBLEMS(50...

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