Saturday, December 17, 2016

2010 Micro FRQ #3

2010 Micro FRQ #3

(A) Using the labelling on the graph, identify the area representing each of the following at the market equilibrium.

(i) Consumer surplus
(ii) Producer surplus

(B) Assume that the production of each unit of candy creates a 
negative externality equal to (p5-p2),
Identify the socially optimal quantity.

(((Production of candy))???    What does a negative production externality look like.

Market Failure Cheat Sheet here.

(C) Assume that the government imposes a pr-unit tax of (p5-p2) to correct for the negative externality. Show.

(i) Consumer surplus
(ii) Dead Weight Loss