Economics 131, UC San Diego Fall 2011 Problem Set 2 – due October 11th Discussion questions (in Keohane and Olmstead). Chapter 4: 2, and Chapter 5: 2, 4, 5 Additional problems: 1. Suppose that the supply curve for wheat is given by Q S = 10P - 10 and that the demand curve for wheat is given by Q D = 200 - 20P. a. Find the market equilibrium price and quantity of wheat. b. Sketch and label the supply curve and the demand curve (with P on the vertical axis). Compute the consumer and producer surplus at the market equilibrium price and quantity. c. Suppose there is a negative externality associated with the production of wheat, with flat marginal damages of MD = 1 for all Q. What is the optimum quantity for society, how much higher or lower is it than the market equilibrium? d. How much loss to society results from the market outcome (as compared to the optimum)? 2. Consider a public good (measured in quantity Q ), that is enjoyed by persons A and B with marginal benefits: MB A = 4
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