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E202Solutions8.1 - Problem Set Eight Solutions Chapter 11 3...

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Problem Set Eight Solutions Chapter 11 3. Suppose the supply curve of boom box rentals on Golden State Park is given by P = 5 + 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 = 20 - 0.2 Q . 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 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 + so c 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. 4. Refer to Problem 3. How would the imposition of a tax of $3 per unit on each daily boom box rental affect efficiency in this market?
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