# PS12Sol - Econ 301 Intermediate Microeconomics Prof Marek...

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Unformatted text preview: Econ 301 Intermediate Microeconomics Prof. Marek Weretka Solutions to problem set 12 (due Tuesday, May 8st, before class) Problem 1 (Externality) a) Positive: Participation in a cellular network R&D by Google Negative Neighbor singing in the bathroom Too many cars in NYC (congestion) b) Without regulation the outcome is likely to be Pareto ine¢ cient. In case of positive externality in market interactions we will observe too little activity, as the positive e/ect on others utility¡pro£t is not internalized. In case of negative externality we observe too much activity. c) In case of positive externality one could introduce a subsidy encouraging the action, while in case of negative one we could tax the activity. Problem 2 (Positive externality) a) Positive b) Given the price of dynamite is equal to one, a pro£t function of the dynamite producer is given by & d = d & TC d ( d; x ) The two secrets of happiness (£rst order conditions) are given by @& d @d = 1 & @TC d ( d; x ) @d = 0 @& d @x = & @TC d ( d; x ) @x = 0 hence @TC d ( d; x ) @d = 1 ) d = 1 & @TC d ( d; x ) @x = ) x = 2 The £rst condition implies that the optimal level of dynamite production is @TC d ( d; x ) @d = 1 and the optimal level of intensity is & @TC d ( d; x ) @x = & 2 ( x & 2) = 0 ) x = 2 The maximal level of pro£t is & d = d & TC d ( d; x ) = 1 & 1 2 = 1 2 c) The marginal bene£t is given by...
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PS12Sol - Econ 301 Intermediate Microeconomics Prof Marek...

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