E202PracticeExam3.9 - Answer The equilibrium quantity of...

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Answer : The equilibrium quantity of boom box rentals is found by solving 5 + 0.1 Q = 20 – 0.2 Q pvt 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 = 8 + soc 0.1 Q. Equating Social MC to demand, we have 8 + 0.1 Q = 20 – 0.2 Q, which solves for 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 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
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