Chat with AIExam 11: Regulation, Public Goods, and Benefit-Cost Analysis
Janet's Silk Printing company is located in a small university town. The major portion of their business is custom printed sweatshirts for university bookstores. As a sideline they also retail printed sweatshirts locally. The local demand for sweatshirts is: Q = 200 - 5P. The average and marginal cost per printed sweatshirt is $8.
(a) Calculate output, price, and profit under the monopoly conditions they enjoy locally.
(b) To test other markets they contemplate opening retail outlets in several university towns where there will be numerous competitors. Calculate price and output under these perfectly competitive conditions.
(c) Compare the competitive and the monopoly price and output situations. Calculate the deadweight loss due to their monopoly position and explain its meaning.
(36) 
Verifieda.Demand is Q = 200 – 5P or, equivalently P = 40 – .2Q. The monopolist maximizes profit by setting MR = MC. Therefore, MR = 40 – .4Q = 8, implying Q = 80 sweatshirts per week. In turn, P = 40 – .2(80) = $24.
b.Under perfect competition P = MC = AC = $8 and Q = 160. Under monopoly, price is considerably higher and output is considerably lower than under perfect competition
c.The deadweight loss is: D = (1/2)(24 - 8)(160 - 80) = $640. When Janet's charges the monopoly price ($24) as opposed to the competitive price ($8), consumer surplus is reduced. The increase in producer surplus is not sufficient to offset the consumer surplus loss and the difference is a deadweight loss.
The following (incomplete) payoff table depicts the net benefits to the United States and the European Union (EU) of reducing carbon emissions. Carbon quantities are in billions of tons and monetary amounts are in billions of dollars. For the United States, the marginal benefit, MB, is $40 for each ton reduced; for the EU, MB = $50 per ton. Each side benefits regardless of who reduces the emissions. For instance, if the EU reduces emissions by 0.6 billion tons and the U.S. does nothing, the US enjoys a benefit of (40)(0.6) = $24 billion, as indicated in the table. For the U.S., the marginal cost (MC) of reducing emissions is $60 per ton; for the EU, MC = $70 per ton.
0 tons 6 tons 0 tons 0,0 24,? .4 tons ?,20 ?,? 0 tons .6 tons 0 tons 0,0 24,? .4 tons ?,20 ?,? (a) Complete the missing entries in the table by computing each side's net benefit. (Net benefit is simply total benefit minus total cost and can be positive or negative).
(b) Determine the (Nash) equilibrium outcome when each side acts independently of the other (state the reduction each side will choose in equilibrium). Is this a prisoner’s dilemma? If the two sides were able to negotiate an emissions agreement, what would be the likely outcome?
(c) Alternatively, suppose the U.S. and the EU allot permits allowing the holder to release carbon emissions, (where the total amount of permits sets the maximum amount of carbon emissions a region can produce). Some commentators urge that the two sides go beyond the 1 billion ton total reduction indicated in the table. Would this increase overall social net benefits? Explain briefly. (Provide a qualitative answer).
(d) Currently, the US and the EU release approximately equal total emissions, and each would receive a total permit allocation proportionally less than its current level, that is, the U.S. and EU might be provided permits equal to 70% (or some other percentage) of their pre-permit emission levels. Do you expect there to be permit trades between the US and the EU? If so, which side will be buying (selling) permits? Explain.
(38) Verified a.The completed table is given by:
b.Each side’s dominant strategy (and the resulting equilibrium) is 0 reductions (the top left cell). Yes, this is a prisoner’s dilemma. Reciprocal reductions (lower right cell) are mutually beneficial, but the individual incentives of each player push them to a less mutually beneficial outcome (0 reductions).
Under a negotiated agreement, the sides should settle on reciprocal reductions – at least the lower right cell, and presumably even greater mutual reductions. This presumes, however, that the parties can find a way to monitor and police the reductions agreement.
c.Yes, going beyond the proposed reductions in the table will further increase social net benefits. This is so because the total marginal benefit from reductions is: 40 + 50 = $90 per ton. The MC of reduction is only $60 and $70 per ton. With MB > MC, further reductions would increase total social benefit. Reductions should stop at the point such that MB = MCUS = MCEU.
d.With approximately equal emissions between the sides and the same proportional allocations, the sides will have comparable shortfalls between current emissions and allotted permits. But the MC of reduction in the US is cheaper than in the EU. Therefore, more emission reduction will take place in the US, inducing sales of unneeded permits from the US to the EU. For instance, if the permit price settled at a level such as P = $66 per ton, it pays to reduce emissions in the US, while the EU would find it cheaper to purchase permits rather than clean up emissions.
A city is deliberating whether to undertake a major infrastructure investment to provide free, high-speed WIFI internet access within its city limits. Alternatively, the city could rely on the private sector to provide access. The city estimates internet demand to be P = 20 - 5Q, where Q denotes number of users (in millions) and P is price per month in dollars. The emerging private market for internet access is considered to be highly competitive, and the typical provider exhibits LAC = LMC = $5 per subscriber per month, where LAC is long-run average cost and LMC is long-run marginal cost. According to the city's estimates, the initial cost for constructing the high-speed network is $600 million and network maintenance costs are $80 million per year. Prepare a benefit-cost analysis to guide the city's decision. Assume that the public and private alternatives will last indefinitely, and that each will be held to a 5% discount rate.
(31) VerifiedConsidering the private Internet alternative under perfect competition: P = LAC = $5 and Q = 3 million subscribers. The industry's economic profit is zero. From the demand curve, consumer surplus is: (.5)(20 - 5)(3) = $22.5 million per month or $270 million per year. Thus, the present value of net social benefits is: 270/.05 = $5.4 billion.
In turn, the public network exhibits MC = 0 and will be free of charge, implying P = $0 and Q = 4 million users. Thus, consumer surplus is: (.5)(20)(4) = $40 million per month or $480 million per year. Therefore, the present value of net social benefits is: (480 - 80)/.05 - 600 = $7.4 billion. Here, the public internet network generates far greater total benefit than the private alternative.
Which of the following is an example of a negative externality?
(40) Suppose that a public project (for example, a golf course) is funded out of general tax revenues. The proportion of the population benefiting from the project is split into a high-income group and a low-income group, and 75% of the benefits go to the high-income group. How does this information affect a benefit-cost analysis?
(33) Which of the following will eliminate the inefficiency problems associated with negative externalities?
(39) What are some of the major problems of benefit-cost analysis? How can they be minimized?
(27) Outline the major steps required to construct a benefit-cost analysis for a government project.
(27) The Federal Communications Commission (FCC) is trying to decide how to allocate an unused part of the radio spectrum for personal communication services (PCS) which are advanced cellular communication services. The monthly demand for the service in a major city is given by Q = 1000 - 10P where Q is the number of subscribers (in thousands) and P is the monthly service price (in $). A typical firm can provide PCS service at the cost: MC = AC = $20 per subscriber per month.
(a) The FCC is considering licensing the exclusive right to use the spectrum to a single firm. What price should the firm set, and what is the resulting total number of subscribers? Suppose the FCC charges the firm to license the spectrum. What is the maximum monetary amount that the FCC could expect to receive for exclusive spectrum rights?
(b) An alternative FCC policy is to allow multiple firms to share the spectrum in order to promote competition in the PCS market. If competition among multiple firms approximates perfect competition, what will be the price and total number of subscribers?
(c) Would it be more efficient for the FCC to license the spectrum to a single firm or allow multiple firms to share the spectrum?
(34) Which of the following statements is true regarding the efficiency of using pollution fees versus quantity standards to regulate pollution?
(34) When deciding among mutually exclusive projects, a public manager should choose:
(26) When consumers possess imperfect information or misinformation:
(35) What is the economic reasoning behind granting a patent to a pharmaceutical firm?
(36) Brown City Pet Food Co. produces a complete line of dry pet foods. During the past year they have been test marketing a meat-based dog food. The firm's plant is located in an industrial park adjacent to the Brown River. The city's water system as well as much of its tourism industry is tied to the river. Recent tests show that a higher-than-normal bacteria count in the river stems from the effluent dumped into the river by the company. Experts are certain that the bacteria are generated from production of the new meat-based dog food. The firm's long-run cost of production is: LAC = LMC = $10 per case, where LAC is long-run average cost and LMC is long-run marginal cost.
(a) The company faces a number of competitors but still has some degree of market power. In particular, the firm's long-run price elasticity is EP = -3. Determine its optimal price and resulting profit margin.
(b) The current high bacteria count makes the river unsuitable and unsafe for swimming and other recreation – a result that has enormous cost to the town. A possible remedy is for the town to treat and clean the river water at a feasible cost of about $2 per thousand grams of effluent. The town has also petitioned Brown to remedy the discharge by installing expensive pollution equipment. However, under current town ordinances, the company is under no obligation to install the equipment and management has indicated that the plant would probably be forced to shut down if they were required to do so. Suggest a means by which the town might regulate the pollution problem.
(c) Is a complete solution to the problems of market failure possible? Explain briefly
(35) Figure 11-1 shows the marginal internal cost [C1], the marginal total cost [C2], and the demand curve [D], associated with a particular good.
![Figure 11-1 shows the marginal internal cost [C<sub>1</sub>], the marginal total cost [C<sub>2</sub>], and the demand curve [D], associated with a particular good. -Refer to Figure 11-1. If the external cost of producing the good is not taken into account, what is the deadweight loss in the market?](https://storage.examlex.com/TB3176/11eab53d_96a7_726b_a318_05eeb67aa78a_TB3176_00_TB3176_00_TB3176_00_TB3176_00.jpg)
-Refer to Figure 11-1. If the external cost of producing the good is not taken into account, what is the deadweight loss in the market?
-Refer to Figure 11-1. If the external cost of producing the good is not taken into account, what is the deadweight loss in the market? (39) Use economic reasoning to comment on the following statement: "In a market where products appear to be similar but significant quality and performance differences exist, lack of information about product quality by some proportion of customers justifies government intervention."
(39) 
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