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ECON 260
Chris Bidner

Answers to Chapter 7 Analytical Problems 1. 7 units are demanded at the original price of $3 giving a consumer surplus of [(10- 3)× 7]/2 = $24.5. 6 units are demanded at the final price of 4 giving a consumer surplus of [(10-4)× 6]/2 = 18. Consumer surplus rises by $7.50. 2. The first step is to calculate the change in producer surplus due to the reduction in pollution. The marginal cost of production pivots downwards. If the pollution cleanup results in no change in price of lobsters, the change in producer surplus is represented by the gray shaded area below. If the price is price is $5/ lobster, the change in producer surplus is $2500. $ MC(before regulation) MC (after regulation) Price=5 0 1000 2000 Quantity of Lobsters The change in producer surplus represents the total reduction in damages to lobster fishers due to cleaning up pollution. This can be represented on a marginal damage curve as the area under the marginal damage curve from the level of pollution with the regulation to the level of pollution without the regulation. This includes only total damages to lobster fishers, if damages to others are reduced, these would need to be added to total damages. 3. Using the defensive expenditures method, the demand curve is estimated for Hamilton (WTP Hamilton). There are no purchases in Winnipeg and so a demand curve cannot be estimated. WTP is hence proxied by the CS Hamiltonians obtain from their air purifiers ($58,593.75). But we can no longer tell wh
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