Cosumnes River College Principles of Microeconomics Problem Set 10 Due May 12, 2015 Name: Spring 2015 Prof. Doell Instructions: Write the ansers clearly and concisely on these sheets in the spaces provided. Do not attach extra sheets. 1. Define negative externality. 2. Define positive externality. 3. Use the graph belo that illustrates supply and demand for bulk paper to anser the questions. a. abel the equilibrium price and quantity (if there are no externalities in this market) as P 0 and Q 0 b. The paper manufacturer creates a negative externality for society as part of paper production. Make an addition to this diagram to reflect that negative externality. c. Given the change you made in part b, label the socially-optimal price and quantity as P 1 and Q 1 d. Suggest a government action that could make the paper manufacturer take into account the negative externality. Principles of Microeconomics: Problem Set 10 Page 1
4. Ne developments of tonhouses are springing up in the ex-urban community of Outland. The supply and demand curves for ne tonhouses are as follos: Demand Supply Price Quantity Price Quantity $140,000 100 $140,000 900 130,000 200 130,000 800 120,000 300 120,000 700 110,000 400 110,000 600 100,000 500 100,000 500 90,000 600 90,000 400 80,000 700 80,000 300 a. What is the market equilibrium quantity of tonhouses and the corresponding price? b. The ne developments impose costs on other current residents for seage, transportation, and congestion. An estimate of the magnitude of these negative externalities is $20,000 per tonhouse. Find the efficient level of tonhouse production and the corresponding price. c. What public policy could be implemented to insure that the optimal quantity is produced? 5. The marginal abatement cost and marginal social cost of pollution in the Northest Air Shed are as follos: Pollution Abatement Cost Social Cost 10 $100 $0 20 80 0 30 60 5 40 50 10 50 40 20 60 30 30 70 15 50 Find the socially efficient level of pollution, and explain ho a marketable permits scheme can achieve the efficient outcome. Ho many permits should be issued? (Pollution is measured as tons of sulfur-oxide.) Principles of Microeconomics: Problem Set 10 Page 2
6. Use the data in the table belo to anser the folloing questions: Quantity Private Private Cost Benefit 0 -- $0 $0 1 $10 2 4 2 9 3 5 3 8 4 6 4 7 5 7 5 6 6 8 6 5 7 9 7 4 8 10 8 3 9 11 9 2 10 12 10 1 11 13 a. What is the externality associated ith each unit of production? Social Cost b. What level of output ill be produced if there is no regulation of the externality? c. What level of output should be produced to achieve economic efficiency? d. Calculate the dollar value of the net gain to society from correcting the externality. 7. Use the graph belo that illustrates supply and demand for education to anser the questions. a. abel the equilibrium price and quantity (if there are no externalities in this market) as P 0 and Q 0 b. Education received by one person also benefits that person s family and neighbors. Make an addition to this diagram to reflect a positive externality. c. Given the change you made in part b, label the socially-optimal price and quantity as P 1 and Q 1 d. Suggest a government action that could make potential students take into account the positive externality. Principles of Microeconomics: Problem Set 10 Page 3
8. With respect to labor supply, explain the folloing: a. Substitution Effect b. Income Effect 9. The data belo sho the relationship beteen the number of orkers hired and the costs and revenues for a small Italian restaurant in East Poughkeepsie, Eddie s Eggplant Emporium. Quantity of abor Output Product Price Wage Revenue () (Q) (MP ) (P) Revenue Product (MRP ) (W) 0 0 -- $10 $11 1 5 10 11 2 10 10 11 3 14 10 11 4 17 10 11 5 19 10 11 6 20 10 11 7 20 10 11 8 19 10 11 a. Fill in the blanks in the above table. b. At hat point do diminishing returns set in? Ho do you kno? (MR) MRP ith P=$12 c. Ho many orkers should be hired? Ho do you kno? d. If fixed costs are $100 and labor is the firm s only variable input, hat is the firms profit? Explain. e. If the price of the product ere to increase to $12, ho many orkers should be hired? Explain? Principles of Microeconomics: Problem Set 10 Page 4
f. If after the price increase ages ere to increase to $15, ho many orkers should be hired? Explain. 10. You decide to start a house painting business next summer. The table belo shos ho many houses you can paint over the summer, depending on the number of friends you hire to ork in your business. Workers Houses Painted 0 0 1 10 2 18 3 23 4 26 5 28 6 29 a. Are there diminishing returns to labor in the house painting business? Ho do you kno? b. You get paid $500 for every house your business paints over the summer. You can hire as many orkers as you like for $1500 (for the entire summer). i. What is the marginal revenue product of the fifth orker? Explain. ii. Ho many orkers do you ant to hire for your business? Explain. c. Dra your demand curve for labor on the axes belo: d. Ho many orkers ill you hire at the given age rate? Explain. Principles of Microeconomics: Problem Set 10 Page 5
11. Explain hat each of the folloing is and hy it might lead to people being paid different ages. a. Inherited Skills b. Human Capital c. Working Conditions d. Unions 12. Ho ould each of the folloing be likely to affect the ages and employment of unskilled orkers ho ork in automobile plant assembly lines? Dra a carefully labeled diagram and give a full explanation of each anser. BE SURE TO USE THE TERMINOOGY WE HAVE BEEN DISCUSSING IN CASS a. Plant managers introduce ne assembly line methods that increase the number of cars that unskilled orkers can produce in an hour hile reducing defects. S D Principles of Microeconomics: Problem Set 10 Page 6
b. As a result of changing preferences, people become less illing to do factory ork. S D c. Robots are introduced to perform most basic assembly line tasks at a loer unit cost. S D 13. Because firm s demand curves for labor are donard sloping, raising the minimum age must reduce employment. Why is this statement rong? When ould raising the minimum age reduce employment? Principles of Microeconomics: Problem Set 10 Page 7