econ 201 - ps5

econ 201 - ps5 - ECONOMICS 201 SPRING 2012 PROBLEM SET 5 1....

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1 ECONOMICS 201 SPRING 2012 PROBLEM SET 5 1. Although Kramer’s business selling fake-wood-wallpaper is rather successful, his production process inadvertently harms Newman’s business selling donuts. The price of fake-wood-wallpaper is P , and Kramer’s cost function is 5 ) ( 3 y y C . Newman’s lost profits due to the production of wallpaper is y y e 2 ) ( . a. Write Kramer’s PMP (ignoring the externality). b. What is his FOC? What is Kramer’s choice of y as a function of P ? c. In contrast, what is the socially optimal y ? Derive this by maximizing the joint profits of Kramer and Newman. d. How does the socially optimal y compare to y without taking into consideration the externality? e. What per-unit tax would induce Kramer to produce the socially optimal level of fake-wood-wallpaper? 2. True or false. A lump-sum fine imposed on the US tobacco industry should help to equalize marginal private costs with marginal social costs in order to correct the negative externalities that smoking may have on the public health care system. 3.
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econ 201 - ps5 - ECONOMICS 201 SPRING 2012 PROBLEM SET 5 1....

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