ANSWERS FOR PROBLEM SET IN CHAPTER 2
Lecture 5. Problem 1:
We have: PA=100 – 4Q → QA= 25 – ¼ PA
PB=40 – Q → QB= 40 – PB
MC = 20
a) When X is private good, it means PA= PB= PAB
Quantity demanded in the market is horizontal summation of quantity demanded
by A and B:
If P≥ 40 then Q= 25 – ¼ P
If P≤ 40 then Q= QA + QB= 25 – ¼P + 40 - P = 65 – 5/4P
The efficient level of good X is produced when
P=MC= 20 → Q= 65 – 5/4*20 =40 (units)
b) When X is public good, it means QA=QB=QAB
Quantity demanded in the market is vertical summation of quantity demanded by
A and B:
If Q≥ 25 then P= 40 – Q
If Q≤ 25 then P= PA + PB= 140 – 5Q
The efficient level of good X is produced when
P = PA + PB =MC= 20 → Q= 140 – 5*Q= 20 → Q = 120/5 = 24 (units)
c) Since the government provides private good X for free (or P = 0) without
quatity limit, quantity demanded will reach to the maximal consumption at 65
units (see Figure 1) above:
Q = 65 – 5/4P = = 65 – 5/4* 0 = 65
The deadweight loss is the triangle EFQ, where the height is equal to MC (or 20),
and the base is between the optimal output level of 40 units and the maximal
output level of 65 units. Thus,
DWL = 1/2 * 20 * (65 – 40) = 250 (VND million)
Lecture 5. Problem 2:
a) Market demand for milk powder:
QX = 12 - 0,6 P (0 < P < 20)
QY = 18 - 0,4 P (0 < P < 45)
Q∑ = QX + QY = 12 – 0,6P + 18 – 0,4P = 30 – P (0 < P < 20) AND
Q∑ = QY = 18 - 0,4 P (20 < P < 45)
b) If milk powder is privately provided in a perfect competition market and MC =
10 USD, price of milk powder is:
P = MC = 10 → QX = 12 – 0,6 x 10 = 6
➔ QY = 18 – 0,4 x 10 = 14
➔ Q* = QX + QY = 6+ 14 = 20 (boxes)
c) The government decides to provide milk powder for free without quantity limit
➔P=0
➔ Boxes of milk powder is demanded by X and Y: Q∑ = 30 – 0 = 30 (boxes)
➔ Qm = 30 (boxes).
Deadweight loss of this policy: DWL = SEFQm
When P = MC = 10 → EQ* = FQm = 10
Q*Qm = EF = Qm – Q* = 30 – 20 = 10 (boxes)
➔ DWL = SEFQm = 1/2 x EF x FQm = 1/2 x 10 x 10 = 50 (USD)
d) DWL = DWL of overconsumption (SAMN) + DWL of underconsumption (SABC)
MC = 10 → Q1 = QX = 6, Q2 = QY = 14, Q*/2 = 10
➔ AB = 10 – 6 = 4
AM = 14 – 10 = 4
Q*
/2 = 10 → For Person X at Q*/2, we have 10 = 12 – 0,6P → PXQ* = 10/3
➔ AC = 10 – 10/3 = 20/3
For Person Y at Q*/2, we have 10 = 18 – 0,4P → PYQ* = 20
➔ AN = 20 – 10 = 10
➔ DWL = SAMN + SABC = 1/2 x AM x AN + 1/2 x AB x AC
= 1/2 x 4 x 10 + 1/2 x 4 x 20/3 = 100/3 (USD)
Lecture 5. Problem 3:
a) Since the cleaning service is public good for both families, the aggregate
demand for yard cleaning (or marginal social benefit) will be vertical summation of
individual families’ demand.
Marginal social benefit (MSB) of yard cleaning for both families is:
MSB = MBI + MBII = 20 – 3Z
The cost for cleaning service of 5 RM is also marginal cost of the service: MC = 5
The efficient level of cleaning services being purchased is achieved when MSB =
MC, or:
20 – 3Z = 5 Z = 5 (times)
The amount of money Family 1 has to pay is:
For each time of cleaning: MBI = 11 – 2 x 5 = 1 (RM)
Total payment: TPI = 1 x 5 = 5 (RM)
The amount of money Family 2 has to pay is:
For each time of cleaning: MBII = 9 – 5 = 4 (RM)
Total payment: TPII = 4 x 5 = 20 (RM)
b) If Family 2 plans to be the free rider, the fake marginal social benefit of year
cleaning for both families will be:
MSB’ = MBI + MBII’ = 17 – 3Z
In this time, the number of cleaning services will be purchased is:
17 – 3Z = 5 Z = 4 (times)
The amount of money family 2 has to pay this time for each time of cleaning is:
MBII’ = 6 – 4 = 2 (RM)
If family 2 do not lie, the amount of money family 2 has to pay for each time (with
Z = 4) is:
MBII = 9 – 4 = 5 (RM)
The “free riding” benefits enjoyed by Family 2 for each time of cleaning is: MB II –
MBII’ = 3 (RM)
Total free riding benefit enjoyed by Family 2 is:
3 x 4 = 12 (RM)
ANSWERS FOR PROBLEM SET IN CHAPTER 2
Lecture 6. Problem 1:
a) The efficient level of pesticide used by the landowner of plot A if he concerns
only his utility: MPB = MC
MPB = Price .Q rice = 5.(10 - 2Q pes ) = 50 - 10Q pes
MC = 6
=> 50 - 10Q pes = 6
=> 44 = 10Q pes => Q pes = 4,4 (unit) = Q1
When the utility of the landowner of plot B is taken into account, his utility
will present MEB of the pesticide use in plot A:
MEB = Pmaize . Q maize = 2.(5 - Q pes ) = 10-2Q pes
Then, MSB = MPB + MEB, or
MSB = MPB + MEB = 50 - 10Q pes + 10-2Q pes = 60-12.Q pes
=> 60-12Q pes =6
=> 12Q pes = 54 => Q pes =4,5 (unit) = Q 0
1
b) Deadweight loss of social welfare: SABC = (Q 0 - Q1 ). MEBQ1
2
1
SABC = (4,5-4,4).(10 - 2.4,4) = 0,06 (RM)
2
c) The compensation amount that Plot B landowner should pay for Plot A
landowner:
The amount of compensation per unit of pesticide is MEBQ0 = 10-2.4,5 = 1 (RM)
∑ 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 = SMNBE
=>∑ 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑐𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 = BE. Q 0 = MEBQ0 . Q 0 = 4,5(10-2.4,5) =4,5(RM)
Lecture 6. Problem 2:
The loss of fish catching output of 4 tons due to waste disposal is marginal
damage (or MEC) created by the chemical production. Therefore,
MEC = Pfish * Qloss = USD 10,000/tons * 4 tons = USD 40,000 (per 1 tons of chemical
produced) or = USD 40 mil. (per 1,000 tons of chemical produced).
In which, Qloss is loss of fish catching output due to chemical production.
MPC = 100 + 5Q and MSC = MPC + MEC = (100 + 5Q) + 40 = 140 + 5Q
Since QD = 60 – 1/3*P => P = 180-3Q = MB
a) Before the sue, the optimal level of chemical production is achieved when
MB = MPC
=> 180 - 3Q = 100 + 5Q
=> Q =10 (thousand tons of chemical production) = Q1
b) The social optimum level of chemical production is achieved when: MSC =
MB
=> MSC = MB
=> 140 + 5Q = 180 – 3Q
=> Q = 5 (thousand tons of chemical production) = Q0
c)
Deadweight loss of chemical production if the court does not interfere is
DWL = SABC = ½ (Q1 – Q0) * MEC(Q1)
= ½ (10- 5). 40 = USD 100 (million)
d) If the chemical firm has to compensate to the cooperative, the efficient level
of compensation per ton of chemicals produced should be equal to MEC(Q0) or
USD 40 million (per thousand tons of chemical production). Thus, total payment
from the chemical firm to the cooperative will be:
MEC(Q0)*Q0 = 40 * 5 = USD 200 (million)
