Assignment 8

OME Assignment 8
1. The market for paper in a particular region in the United States is characterized by the
following demand and supply curves: Q D = 160,000 - 2000P and QS = 40,000 + 2000P where
QD is the quantity demanded in 100-pound lots, QS is the quantity supplied in 100-pound
lots, and P is the price per 100-pound lot. Currently there is no attempt to regulate the
dumping of effluent into streams and rivers by the paper mills. As a result, dumping is
widespread. The marginal external cost (MEC) associated with the production of paper is
given by the curve MEC = 0.0006QS.
a. Calculate the output and price of paper if it is produced under competitive conditions
and no attempt is made to monitor or regulate the dumping of effluent.
At Equilibrium,
QD = Q S
160000-2000P = 40000+2000P
4000P = 120000
P =$ 30 per 100-pound lot
Q = 100,000 of 100-pound lot
b. Determine the socially efficient price and output of paper.
Marginal Social Cost = MC + MEC
P = 0.0005QS -20
P = 80 – 0.0005QD
MSC = MC +MEC
= 0.0005QS – 20 + 0.0006QS
= 0.0011QS – 20
0.0011Q – 20 = 80 – 0.0005Q
0.0016Q = 100
Q = 62,500 of 100 pound lot
62500 = 160000 – 2000P
P = $ 48.75 per 100-pound lot
c. Explain why the answers you calculated in parts (a) and (b) differ
In part a, the price was calculated by taking into account only the cost involved in
producing the products. Whereas, in part b the external costs incurred are taken in
account, because of which there is increase in price and decrease in quantity.
2. In a market for dry cleaning, the inverse market demand function is given by P = 100 - Q, and
the (private) marginal cost of production for the aggregation of all dry-cleaning firms is given
by MC = 10 + Q. Finally, the pollution generated by the dry cleaning process creates external
damages given by the marginal external cost curve MEC = Q.
a. Calculate the output and price of dry cleaning if it is produced under competitive
conditions without regulation.
At equilibrium, MC =P.
10+Q = 100-Q
2Q = 90
Q = 45
P =$ 55
b. Determine the socially efficient price and output of dry cleaning.
MSC = MC + MEC
= 10+Q+Q
= 10+2Q
10+2Q = 100-Q
3Q = 90
Q = 30
P =$ 70
c. Determine the tax that would result in a competitive market producing the socially
efficient output
Let T be tax amount per quantity.
MC + Tax = P
10+30 + 30T = 70
30T = 30
T=$1
3. A beekeeper lives adjacent to an apple orchard. The orchard owner benefits from the bees
because each hive pollinates about one acre of apple trees. The orchard owner pays nothing
for this service, however, because the bees come to the orchard without his having to do
anything. Because there are not enough bees to pollinate the entire orchard, the orchard
owner must complete the pollination by artificial means, at a cost of $10 per acre of trees.
Beekeeping has a marginal cost MC = 10 + 5Q, where Q is the number of beehives. Each hive
yields $40 worth of honey.
a. How many beehives will the beekeeper maintain?
MC = P
10+5Q = 40
Q = 6 beehives
b. Is this the economically efficient number of hives?

Because there are not enough bees to pollinates, he incurs an additional cost of $ 10.
10+5Q = 50
Q = 8 beehives
c. What changes would lead to a more efficient operation?
As the orchard owner needs the help of the beekeeper, they can enter to negotiations
where the orchard owner can ask for a reduced price for regular service so that both of
them become benefited.
4. There are three groups in a community. Their demand curves for public television in hours of
programming, T, are given respectively by W1 = $200 – T, W2 = $240 - 2T, W3 = $320 - 2T
Suppose public television is a pure public good that can be produced at a constant marginal
cost of $200 per hour
a. What is the efficient number of hours of public television?
The demand curves are the marginal benefits of each customer. Thus,
200-T+240-2T+320-2T = 200
T = 112 hours
b. How much public television would a competitive private market provide?
The socially efficient price can be found by equating the individual marginal benefits to
marginal costs and summing them up.
200-TW1 = 200
TW1 = 0
W1 will not provide any program hours.
240-2TW2 = 200
TW2 = 20 hours
W2 will provide program for 20 hours.
320-2 TW3 = 200
TW3 = 60 hours
W3 will provide program for 60 hours.
Thus total hours equal to 20+60 = 80 hours

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OME Assignment 8

P =$ 30 per 100-pound lot

Q = 100,000 of 100-pound lot

b. Determine the socially efficient price and output of paper.

Marginal Social Cost = MC + MEC

Q = 62,500 of 100 pound lot

62500 = 160000 – 2000P

P = $ 48.75 per 100-pound lot

b. Determine the socially efficient price and output of dry cleaning.

Let T be tax amount per quantity.

b. Is this the economically efficient number of hives?

c. What changes would lead to a more efficient operation?

b. How much public television would a competitive private market provide?

W1 will not provide any program hours.

W2 will provide program for 20 hours.

320-2 TW3 = 200

W3 will provide program for 60 hours.

Thus total hours equal to 20+60 = 80 hours

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