PS11_solutions

PS11_solutions - Intermediate Microeconomics, 2008 Problem...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Intermediate Microeconomics, 2008 Problem Set No. 11: Solutions Problems (17.16) Guards patrolling a mall protect the malls two stores. The television stores demand curve for guards is strictly greater at all prices than that of the ice-cream parlor. The marginal cost of a guard is $ 10 per hour. Use a diagram to show the equilibrium, and compare that to the socially optimal equilibrium. Now suppose that the malls owner will provide an $ s per hour subsidy. Show in your graph the optimal s that leads to the socially optimal outcome for the two stores. Using the information in Figure 17.6 in the text: at the market price of guard service of $10 per hour, the TV store will hire four guards and the ice-cream store will hire none. Now with a $2 per hour subsidy from the mall owner, the private price of the TV store will be $8 per hour. Subse- quently, the TV store will hire 5 guards, which makes the social marginal benefit equal to social marginal cost and therefore achieves the socially optimal quantity of guards. (17.22) Suppose that the inverse demand curve for paper is p = 200- Q , the private marginal cost (unregulated competitive market supply) is MC p = 80 + Q , and the marginal harm from gunk is MC g = Q . a) What is the unregulated competitive equilibrium? The unregulated equilibrium (found where MC p = p ) is: MC p = p 80 + Q = 200- Q 2 Q = 120 Q = 60 so Q = 60 ,p = 140. b) What is the social optimum? What specific tax (per unit of output of gunk) results in the social optimum? The socially optimal equilibrium (found where MC s = MC p + MC g = p ) is: MC p + MC g = p 80 + Q + Q = 200- Q 3 Q = 120 Q = 40 1 so Q = 40 ,p = 160. A specific tax of $40 per unit results in this outcome, because with the tax, MC p = 120 + Q . (17.25) The tenants of a mall are protected by the guard service, q . The number of guards per hour demanded by the television store is q 1 = a 1 + b 1 p , where p is the price of one hour of guard services. The ice-cream stores demand is q 2 = a 2 + b 2 p . What is the social demand for this service? To find the social demand for the service, add the demand curves vertically (you must solve for p first). Individual inverted demands are p = (- a 1 /b 1 ) + (1 /b 1 ) q for the television store, and p = (- a 2 /b 2 ) + (1 /b 2 ) q for the ice-cream store. When added, the resulting curve will be nonlinear unless the demand curves have the same horizontal axis intercept. Note that b 1 ,b 2 < 0. For the solution below, assume that a 1 /b 1 < a 2 /b 2 . p = (- a 1 /b 1- a 2 /b 2 ) + (1 /b 1 + 1 /b 2 ) q if q < a 1 p = (- a 2 /b 2 ) + (1 /b 2 ) q if q > a 1 (10.10) Initially, Michael has 10 candy bars and 5 cookies, and Tony has 5 candy bars and 10 cookies. After trading, Michael has 12 candy bars and 3 cookies. In an Edgeworth box, label the initial allocation A and the new allocation B . Draw some indifference curves that are consistent with this trade being optimal for both Michael and Tony....
View Full Document

This note was uploaded on 12/10/2011 for the course ECON 401 taught by Professor Burbidge,john during the Winter '08 term at Waterloo.

Page1 / 14

PS11_solutions - Intermediate Microeconomics, 2008 Problem...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online