E202Exam3.9 - it identical to the Social MC curve The...

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Chapter 11 5. (10 pts) Suppose the supply curve of boom box rentals on Golden State Park is given by P = 10 + 0.1 Q , where P is the daily rent per unit in dollars and Q is the number of units rented in hundreds per day. The demand curve for boom boxes is P = 25 - 0.2 Q . a. If each boom box imposes $3 per day in noise costs on others, by how much will the equilibrium number of boom boxes rented exceed the socially optimal number? Answer : The equilibrium quantity of boom box rentals is found by solving 10 + 0.1 Q = 25 – 0.2 pvt Q for Q = 50 units per day. To find the socially optimal number of rentals we first find the Social MC curve by adding the $3 per unit noise cost to the Private MC curve to get Social MC = 13 + 0.1 Q. Equating Social MC to demand, we have 13 + 0.1 Q = 25 – 0.2 Q, which solves for soc Q = 40 units per day, or 10 less than the equilibrium number. b. How would the imposition of a tax of $3 per unit on each daily boom box rental affect efficiency in this market? Answer : Imposition of this tax would shift the Private MC curve upward by $3 per unit, making
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Unformatted text preview: it identical to the Social MC curve. The socially optimal number of boom boxes would be rented, resulting in an overall increase in efficiency in this market. 6. (5pts) Suppose the law says that Jones may not emit smoke from his factory unless he gets permission from Smith, who lives downwind. If the relevant costs and benefits of filtering the smoke from Jones’s production process are as shown in the following table, and if Jones and Smith can negotiate with one another at no cost, will Jones emit smoke? Jones emits smoke Jones does not emit smoke Surplus for Jones $200 $160 Surplus for Smith 400 450 Answer : The most efficient outcome is for Jones to not emit smoke, because the total daily surplus in that case will be $610, compared to only $600 when Jones emits smoke. The most Jones would be willing to pay Smith is $40 to be able to emit smoke, but Smith would need to be paid at least $50 to agree....
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