Problem set 1

Problem set 1 - MC(X = X and marginal benefits are MB(X = 6...

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Economics 131, UC San Diego Fall 2011 Problem Set 1 – due October 4th Discussion questions (in Keohane and Olmstead from page 235): Chapter 2: 1 and 6 Chapter 3: 2, 7 and 8 Additional problems: 1. If the discount rate is 2%, what is the most we should spend on a policy today that creates $30 billion in benefits 10 years from now? 2. The marginal cost of abating X units of pollution is given by: MC(X) = 5+5X. Consider the following possibilities for marginal benefits: a) Suppose marginal benefits at different levels of X are MB(X) = 3-X, what is the optimal amount of pollution abatement? b) Come up with an example of a different marginal benefit curve that instead makes the optimal amount of abatement X* = 10. The curve should be downward sloping. 3. The marginal cost of abating X units of pollution is given by:
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Unformatted text preview: MC(X) = X and marginal benefits are MB(X) = 6 X. a) What is the value of total costs and total benefits at X*? b) Are we better off doing nothing or setting X = 6? In a sentence or two discuss the realism of this MB curve in describing clean water (i.e. the abatement of pollution into a water supply). 4. Sketch a set of total cost and benefit curves with the following properties: i) Both curves are concave ii) The maximum of net benefits occurs where X* is both finite and greater than zero. Sketch the corresponding marginal cost curves. Which has the steeper slope? 5. Argue in a sentence or two why the maximum of net benefits would be infinite if the marginal benefit curve crosses the marginal cost curve once from below (moving from left to right on the standard figure for abatement)....
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