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Unformatted text preview: ected cost d. As much as you want e. You shouldn't sell your U-pass Part II: Long Answer (Answer 4 out of the 5 questions) 1. Externality In order to promote greener life style, the BC government has imposed a carbon tax of 30 cents for every liter of gas produced. The demand schedule for gas in BC is Q=150-0.5P, and the marginal cost of every liter of gas is given by MC=150+Q. The marginal externality cost is given by MEC=100+2Q. a) Determine the equilibrium price and quantity of gas, assuming the industry to be perfectly competitive. (3pt) Answer: Demand: Q=150-0.5P P= 300-2Q Supply=MC=150+Q Supply=Demand 300-2Q=150+Q Q=50 liters, P=200 cents=$2 b) Does the carbon tax completely eliminate the deadweight social loss? How much does it eliminate? (6pt) Answer: MSC=MEC+MC=(100+2Q)+(150+Q)=250+3Q MSC=Demand 250+3Q=300-2Q Q=10 liters, P=280 cents=$2.80 Equilibrium with tax: Supply+tax=Demand 150+Q+30=300-2Q Q=40, P=220 cents=$2.20 40>10 & 220<280, therefore the tax doesn't completely eliminate the DWL. Plug in the equilibrium quantity from part a to MSC P=400 Original DWL: (400-200)(50-10)2=4000 Plug in the equilibrium quantity with tax to MSC P=370 New DWL: (370-220)(40-10)2=2250 The tax eliminated 4000-2250=1750 DWL c) Draw a diagram that reflects the effects of carbon tax. Make sure to include situations before and after the tax is implemented. (6pt) Answer: Diagram should include: Supply and Demand (2pt) MSC (1pt) Original and after-tax DWL (2pt) Equilibrium after tax (2pt) 2. Market Power Andrew wishes to purchase all used textbooks from students, thus establishing a monopoly business of used textbooks. Currently the market demand of used books is given by P=300-2Q, and the supply curve of this perfectly competitive market is perfectly inelastic, at Q=150. a) Assuming that Andrew has to first purchase books at the current market price. How much does he have to spend for his scheme to work? (1pt) Answer: P=300-2Q=150 P=$75 PQ=75150=$11,125 b) The demand of used bo...
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This document was uploaded on 03/15/2014 for the course COMM 295 at The University of British Columbia.
- Fall '09