midterm - EEP101/ECON125 Spring 99 Prof D. Zilberman TA's:...

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EEP101/ECON125 Spring 99 Prof D. Zilberman TA's: Malick/Marceau MIDTERM Part A: Numerical Questions 1. Assume that the marginal cost (MC) of producing a good is given by MC = 20 + 3Q. The marginal benefits (MB) are given by MB =120 – 2Q, and the marginal social benefits (MSB) are given by MSB = 120 – Q. a) Calculate the socially optimal level of output (Q*). b) Calculate the competitive equilibrium output (Q c ) and the competitive equilibrium price (P c ). Determine the deadweight loss (DWL). c) Determine the consumer surplus (CS) and the producer surplus (PS) under the competitive case. d) Assume that the government wants to subsidize production in order to fix the externality problem. Determine the optimal unit subsidy. e) If the government imposes the subsidy found by you in part (d), by how much does the total external benefit change? 2. Assume that you have the following information about the individual demands for a public good: High income: P h = 40 – Q Low income: P L = 20 – Q
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midterm - EEP101/ECON125 Spring 99 Prof D. Zilberman TA's:...

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