Eco_1_Problem_Set_3

# Eco_1_Problem_Set_3 - dollars per drum of lubricant...

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Eco 1 Spring 2007 Problem Set 3 Review the appendix of Chapter 4 of your text, before attempting this one. 1) Suppose you are the vice president of operations of a manufacturing firm, which sells an industrial lubricant in a competitive market. Further suppose that your economist gives you the following supply and demand functions: Demand: Q D = 36 – 3 P Supply: Q S = -4 + P Where P is price in dollars per drum, and Q D , Q S is the quantity in drums. a. Plot the market graphically, showing the equilibrium (make sure you label all axes clearly, as well as any points of intersection). b. Calculate the consumer surplus in the market, in dollars. c. Calculate the producer surplus in the market, in dollars. d. Is there any economic inefficiency in the market? Now suppose the government decides that industrial lubricants generate an unacceptable level of pollution at the market equilibrium quantity of production, and imposes a tax of 4

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