NatResProblems

NatResProblems - 12/10/2010 NatResProblems.doc R. Deacon 1...

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12/10/2010 NatResProblems.doc 1 R. Deacon Econ 122 Sample Homework Problem Applied Policy Analysis (20 pts.) Please write answers in underlined blanks. Unless instructed otherwise, write explanations on this sheet available space. Explanations can be brief (1 or 2 sentences). A monopolist produces a product at the constant average and marginal cost of c per unit. Demand for the product is given by the equation P = a -bQ. For this problem, a=100, b=1, c=20. 1. (3 pts.) On the back of this sheet draw the monopolist’s demand, marginal cost, and marginal revenue curves. What output rate will the monopolist produce? Explain briefly (1 or 2 sentences) in space below. 2. (3 pts.) What is the deadweight loss caused by having this industry monopolized? . What does this deadweight loss represent? Explain briefly (1 or 2 sentences). How much consumer's surplus do consumers enjoy from consuming the good? . 3. (4 pts.) Suppose it is learned that the monopolist's production process causes air pollution that damages human health. Each unit of output produced causes a general increase in air pollution that all consumers experience. The aggregate pollution cost to all consumers is h per unit output, where h=30. In light of this, what is the net benefit consumers enjoy from consuming the monopolist's product, i.e., consumer surplus minus health costs? . Will consumers stop using the product? Explain briefly (1 or 2 sentences) why or why not.
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NatResProblems.doc 2 4. (4 pts.) A local pollution control authority is formed. It learns about the pollution damages and forces the monopolist to pay a pollution fine, equal to h for each unit of output produced. The fine revenue is given out to consumers in lump sum payments, independent of their individual consumption. What price and output will the monopolist now choose? P= , Q= . What is the net benefit consumers now enjoy from consuming the monopolist's output, i.e., consumer surplus minus health costs plus fine revenue? . Are consumers better off as a result of the pollution control authority's policy? Explain briefly (1 or 2 sentences). 5. (3 pts.) Next, suppose the monopoly is turned into a competitive industry, i.e., broken up into numerous small firms each of which takes price as given and can produce output at a minimum average cost of c per unit. The same health costs, h per unit, are still present. What long run price and output would this new industry produce, assuming the pollution control agency still forces producers to pay fines for the health damages they impose? (The long run is defined as a period of time long enough to allow entry and exit of firms.) P= , Q = . 6. (3 pts.) With competition, what net benefit do consumers enjoy from consuming the product now (consumer surplus minus health costs plus fine revenue?) . Could the net benefit to consumers and producers be increased if the industry were to
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NatResProblems - 12/10/2010 NatResProblems.doc R. Deacon 1...

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