Economics

Micro Economics
October 29, 2020
Micro Economics
October 29, 2020

Suppose that you own a factory that emits smoke. The city of Hobart isdownwind of the factory and residents do not like the smoke emitted from your factory. The law states that your factory is allowed to emit unfiltered smoke only with permission ofHobart city council. The costs and benefits of filtering smoke from your production are reported in the table.

BEA111 Principles of Economics 1

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Question 1

Suppose that you own a factory that emits smoke.  The city of Hobart isdownwind of the factory and residents do not like the smoke emitted from your factory.  The law states that your factory is allowed to emit unfiltered smoke only with permission ofHobart city council.  The costs and benefits of filtering smoke from your production are reported in the table.

Surplus Factory Emits Smoke Factory Does not Emit Smoke
Factory ($) 200 186
Hobart ($) 400 410
  1. Is it socially optimal for your factory to emit smoke?
  1. If there are no costs to negotiation, will the factory emit unfiltered smoke?
  1. Suppose that negotiations are costly. If the costs of negotiations are $15 to you and $10 to the Hobart city council, will your factory emit smoke?

Question 2

Suppose that you run a tutoring service for economics students.  The table below reports the demand for your services by 8 students per week.  In the table are reported each student’s reservation price of a tutoring session per week.  Note that each student demands at most one tutorial session per week.

In addition, the opportunity cost of your time is $24 per session.  There are no competitors for your service.

Student Reservation Price

($ per session)

Number of

Sessions given

Total Revenue

($ per week)

Marginal Revenue

($ per Week)

A 40 1
B 38 2
C 36 3
D 34 4
E 32 5
F 30 6
G 28 7
H 26 8
  1. How many tutor session is socially optimal?
  1. Assume that you can only charge a single price for your services. What price are you going to charge the students to maximize your profit?  How many sessions will you sell?
  1. Now, suppose that you are able to practice perfect price discrimination. How many sessions will you sell to maximise profits?  Compute consumer surplus and the Deadweight loss.
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