PRACTICE QUESTIONS FOR CHAPTER 5-1

PRACTICE QUESTIONS FOR CHAPTER 5-1 - Econ 454 Fall 2011...

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Econ 454 Fall 2011 PRACTICE QUESTIONS FOR CHAPTER 5 The following questions refer to the following situation: Let P be the price of fertilizer and Q the quantity of fertilizer demanded in tons. Suppose that the demand function for fertilizer is given by P = 8 - Q and the marginal private cost (MPC) of producing fertilizer is constant at $4 per ton. The supply and demand functions are shown on the figure below. Suppose, also that there is a negative externality associated with fertilizer production and that the marginal damage to the environment is constant at $2 per ton produced. The marginal social cost (MSC) of fertilizer production is thus $6 per ton. 0 P Q MPC (ACTUAL) Demand MSC = MPC + MD 8 A 2 4 8 6 MPC (IF RETROFITTED) 7 1 4 B C 1. At which price (P) and quantity (Q) will competitive producers (who ignore the externality) want to produce? a. P = $4, Q = 4 c. P = $7, Q = 1 b. P = $6, Q = 2 d. NOTA 2. The consumers' surplus associated with this competitive price and quantity (without the externality) is
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PRACTICE QUESTIONS FOR CHAPTER 5-1 - Econ 454 Fall 2011...

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