2. (40 points in total) Suppose the inverse market demand curve for a product is p...

 

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2. (40 points in total) Suppose the inverse market demand curve for a product is p = 100 - 2Qd, where p is the price in dollars per unit and Qa is the quantity demanded. Suppose the inverse market supply curve for the product is p = 10 + 0.5Qs, where Q, is the quantity supplied. a) (6 points in total; 3 for the diagram) Find the equilibrium price and quantity, and illustrate your answer in a diagram. b) (4 points) Now suppose that pollution is generated by this market activity. What type of market failure does pollution represent and why is it of concern to society? c) (2 points) If the marginal cost of the social and ecological damages caused by the pollution, MCE, grows as production increases in the following way: MCE = 0.5Qs, what is the equation for the social marginal cost curve? d) (3 points in total) Using the social marginal cost curve, calculate the socially efficient price and quantity. e) (10 points; 5 for the diagram) Using a second diagram, illustrate how the market failure due to pollution would affect the market equilibrium, explain what the demand and supply curves mean, and identify both the social equilibrium and the market equilibrium using your calculations from parts a and d. f) (7 points) Label the areas of your diagram in part e and use those areas to indicate the change in consumer surplus, the change in producer surplus, the change in third-party welfare and the market inefficiency that is caused by pollution. g) (3 points) What is the economic significance of the area in your second diagram that represents the market inefficiency? h) (2 points) What is the maximum dollar benefit of an intervention to correct the negative externality? i) (3 points) How might the government intervene in the market to eliminate this inefficiency? Explain. 2. (40 points in total) Suppose the inverse market demand curve for a product is p = 100 - 2Qd, where p is the price in dollars per unit and Qa is the quantity demanded. Suppose the inverse market supply curve for the product is p = 10 + 0.5Qs, where Q, is the quantity supplied. a) (6 points in total; 3 for the diagram) Find the equilibrium price and quantity, and illustrate your answer in a diagram. b) (4 points) Now suppose that pollution is generated by this market activity. What type of market failure does pollution represent and why is it of concern to society? c) (2 points) If the marginal cost of the social and ecological damages caused by the pollution, MCE, grows as production increases in the following way: MCE = 0.5Qs, what is the equation for the social marginal cost curve? d) (3 points in total) Using the social marginal cost curve, calculate the socially efficient price and quantity. e) (10 points; 5 for the diagram) Using a second diagram, illustrate how the market failure due to pollution would affect the market equilibrium, explain what the demand and supply curves mean, and identify both the social equilibrium and the market equilibrium using your calculations from parts a and d. f) (7 points) Label the areas of your diagram in part e and use those areas to indicate the change in consumer surplus, the change in producer surplus, the change in third-party welfare and the market inefficiency that is caused by pollution. g) (3 points) What is the economic significance of the area in your second diagram that represents the market inefficiency? h) (2 points) What is the maximum dollar benefit of an intervention to correct the negative externality? i) (3 points) How might the government intervene in the market to eliminate this inefficiency? Explain.