1.Suppose the market for paper in the town of Athabasca has the following cost functions:
Demand = (P) = 250 – 3Q
Private MC = 35 +2Q
and
the marginal external cost associated with the paper production is given by the expression: MEC = 5 + Q
a.If the above market is competitive, calculate the socially efficient levels of output and price.
b.Now, if the firm is operating as a monopoly, calculate the level of output.
c.Suppose the above factory has marginal social costs MSC = -3 + 8.5Q and abatement costs MCA = 20 – 0.5Q. If Athabasca wishes to set pollution standards for the paper factory, what daily level of pollution should be allowed?
d.Now let’s assume the town council favours an emissions tax for the factory. If a tax is implemented, at what level should the tax be set?
2.Provide answers for the each of the following independent questions.
a.Suppose Auto Fitters sells auto parts and car accessories from coast to coast. Last year’s report suggested that a good salesperson can sell $1,000,000 a year worth of goods, while a poor one can sell only $100,000. Job applicants know if they are good or bad salespeople, but the hiring manager does not. The firm will offer job applicants a choice of a fixed salary of $25,000 or a commission of 20%.
Assuming risk-neutral salespersons and the possibility of opportunistic behaviour, will this choice of contracts allow the firm to distinguish between good salespeople and bad ones before the hiring decision is made?
b.Suppose Janet has the following demands for regular medical visits:
Q = 12 – 0.2P when she is healthy, and
Q = 40 – 0.4P when she is sick.
Under the current insurance plan, Janet pays an average of $60 per visit, and she is sick 50% of the time. Janet considers an alternative insurance plan so she can minimize the cost per clinic visit. This insurance company offered her a plan that includes the first visit for free but requires her to pay $10 per medical visit thereafter. Based on the above information, compare the two plans in terms of the trade-off between risk and moral hazad
3.John and Emily are both suppliers of complete packages of printers and supplies. Suppose the manufacturers of printing paper and ink cartridges have gone on strike. John has 100 cases of paper left, but he has ink cartridges in stock for only 20 printers. On the other hand, Emily has enough ink cartridges for 100 printers, and only 20 cases of paper.
a.Based on the above information, draw an Edgeworth box. Label the lower left corner of the box “John’s printers” and the upper right corner of the box “Emily’s printers.” Label the vertical side of the box as printers and the horizontal side as ink cartridges. Label the initial endowment point with the letter A.
b.Now sketch into your Edgeworth box the isoquant for both John and Emily that reflects the fact that ink cartridges and printer paper are perfect complements.
c.Explain why the initial starting point is optimal or not, using the words “marginal rate of technical substitution.”
d.If no trade of inputs takes place, and neither supplier can get outside parts, how many complete printer packages can be sold by these suppliers?
e.If John and Emily exchange inputs until they reach the contract curve, how many printer packages will be produced if all resources are used?
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