Question

In: Economics

4. The inverse demand for leather is given by P = 50 - 0.5Q. The industry...

4. The inverse demand for leather is given by P = 50 - 0.5Q. The industry supply of leather is determined by its marginal cost: MC = 0.45Q. Unfortunately, the production of leather causes noxious chemical residue to leach into groundwater supplies. The marginal external cost caused by these residues grows with the amount of output, and is measured as MEC = 0.05Q.

a ) Suppose that the government wishes to reduce the externality to efficient levels by imposing a restriction on quantity (a quota). What maximum level of output should it set for leather production? What price would prevail in the marketplace once this quota is in place? ( 5 mark )

b) Suppose that the government wishes to reduce the externality to efficient level by levying a tax on leather production. How high would that tax need to be? What is the resulting net price paid by buyers once the tax is in place? How much leather is bought and sold with the tax in place? ( 5 mark )

Solutions

Expert Solution


Related Solutions

Suppose the inverse demand and inverse supply functions for a good are given as P= 200-0.5Q...
Suppose the inverse demand and inverse supply functions for a good are given as P= 200-0.5Q and    P= 20 + 0.5 Q.    Calculate the initial equilibrium price and quantity. Draw the above inverse demand and inverse supply functions. Suppose a per unit tax of $10.00 was levied on sellers. Determine graphically and algebraically the effect of the tax on the price paid by demanders, the price received by sellers, the total tax paid, and the fraction of the tax paid...
The inverse demand function for a medication is p = 10000 - 0.5Q, where p is...
The inverse demand function for a medication is p = 10000 - 0.5Q, where p is the market price and Q is quantity demanded MC = 100 + 0.05Q. What is the competitive market price and quantity in this market, and producer and consumer surplus and social welfare?          Suppose production creates an externality. You can assume marginal external costs are simply MEC = 400. Based on this information, what is your estimate for a regulated market outcome where marginal social...
Suppose a firm's inverse demand curve is given by P = 120 - 0.5Q and its cost equation is
Suppose a firm's inverse demand curve is given by P = 120 - 0.5Q and its cost equation isC = 420 + 60Q + Q2.Find the firm's optimal Q, P, and π two ways…first, by using the profit and marginal profit equations and then by setting MR = MC. Also, provide an Excel-created graph of the demand curve, MR curve, and MC curve (please do the excel graphs).Suppose instead that the firm can sell any and all of its output...
10-The demand function for a product is given by p=80-0.5Q and the supply function is p=50+0.25Q,...
10-The demand function for a product is given by p=80-0.5Q and the supply function is p=50+0.25Q, where p is the price and Q is the quantity. Suppose that the government impose a tax of $15 on every unit sold. Find equilibrium price and quantity before imposing the tax. Find price of buyer and seller and the quantity sold in the market after tax. Find the tax burden on buyer and seller. Find government revenue and deadweight loss (DWL) and the...
Two firms operate in an industry with inverse demand given by p = 12 – q....
Two firms operate in an industry with inverse demand given by p = 12 – q. each firm operates with constant marginal cost equal to 0 and fixed cost equal to 4. Firms compete by setting the quantity to sell in the market . A) Determine the best reply function of each firm. b) Determine what are in equilibrium the quantities offered by each firm, the market price and the profits obtained by each firm. Assume now N firms operate...
Suppose that, in the market for strawberries, domestic demand is given by P= 40 – 0.5Q,...
Suppose that, in the market for strawberries, domestic demand is given by P= 40 – 0.5Q, and domestic supply is given by P = 0.5Q, where Q represents tonne of strawberry. Further, suppose that the world price of strawberry is $5 per tonne, and the government decides to place a $10 per tonne import tariff on strawberries. A. On a graph, demonstrate the effect of the tariff on the equilibrium quantity of imports. (Clearly label the values both with and...
An industry has two firms. The inverse demand function for this industry is p = 74...
An industry has two firms. The inverse demand function for this industry is p = 74 - 4q. Both firms produce at a constant unit cost of $14 per unit. What is the Cournot equilibrium price for this industry?
Consider an industry with inverse demand P = 32 − 4Q. The industry has an incumbent...
Consider an industry with inverse demand P = 32 − 4Q. The industry has an incumbent firm (i) and a potential entrant (e). Each firm has a marginal cost of 0. The entrant pays a fixed cost of 9 only if it enters the industry. Assume it enters the industry only if its profits are greater than 0. (a) What is the incumbent’s output as a monopoly without threat of entry? (b) What is the incumbent’s output and profit with...
Total market demand for pillows in San Francisco is given by P = 125 - 0.5Q....
Total market demand for pillows in San Francisco is given by P = 125 - 0.5Q. There are 2 suppliers of pillows in the market, who each have a constant marginal cost of $5 per pillow. Assuming no fixed costs, if the 2 firms compete against each other in a Cournot duopoly, how much lower will the 2 firms' combined profits be compared to if they colluded and acted as a monopoly? (Write answer without a negative sign and without...
Consider the following industry where the inverse market demand is given by the function: p=180-Y where...
Consider the following industry where the inverse market demand is given by the function: p=180-Y where Y is the total market output. There are two firms in the market, each has a total cost function: ci (yi)=3(yi)2 where i=1,2 is the label of the firm. Suppose the firms act as Cournot duopolists. What output level will each firm produce in order to maximize profits?.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT