432review exam I - Westerhold Name Econ432 1 .,theyalso...

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Westerhold Name:_____________________________ Econ 432 Review Problems with Answers for Exam I 1. Negative Exernalities  Suppose the factory produces paper.  As a by-product of this paper production, they also  produce dangerous emissions of toxic gases.  The De-Lite car factory, down the road,  experiences a negative externality from this production process.  Suppose that the supply  curve (private marginal costs) for the paper factory is 5 + 2.5Qs and it faces a market  demand of Q d =15 -.5P or P=30-2Qd.  The marginal damages caused by the production of  paper can be written as MD=1/2Q   (a) Graph the MB, MPC, and MD curves for this market showing the y-intercept values:
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(b) Find the equilibrium price and quantity in the market for paper with no government  intervention in the market.  Round your quantity to the nearest whole number. Show your  work and indicate your equilibrium values on the graph above. (c) Find the socially optimal level of paper and the corresponding price. Round your quantity  to the nearest whole number. Show your work and indicate your socially efficient values  for price and quantity on the graph above. (d)  How much should the paper factory be taxed per unit of output? Show your work. Show  this on vertical distance on your graph (you could be off slightly due to rounding).
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(e) What is the amount of tax revenue generated? Show your work and show this area on  your graph showing your numbers.
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