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# hw1_answers - H omework#1 Due in class Wednesday 7 April...

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Homework #1: Due in class Wednesday 7 April M134 Question 1 a) You are the President of a Steel Factory. Your nerds have brought you key information on your firm’s revenue and costs incurred from different levels of steel production. Given your factory’s capacity, you must choose between 3 levels of production. Production Revenue (\$) Cost (\$) Profit =Revenue- costs 0 0 0 0 20 5000 3000 2000 40 10000 4000 6000 If you are a profit maximizer, what level of production do you choose? Set Q=40 and get \$6000 in profits b) A byproduct of steel production is pollution. Each unit of production creates one unit of pollution. There are N people who live near your factory. Each of them suffer S sick days when they are exposed to one extra unit of pollution. Each person is willing to pay \$W to not be sick 1 day. Write down an equation for the total social cost imposed by the factory’s profit maximizing production. Total social cost = private cost + externality = 4000 + 40*N*S*W

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c) Suppose that N=500, S=2, and W=5, given these parameters; does the firm’s profit maximizing choice maximize society’s well being? Explain
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