ECON 260 Lecture Notes - Purifiers, Demand Curve, Marginal Cost

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2 Feb 2013
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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 what sort of
improvement in air quality this change in CS represents. The defensive expenditures
are likely to be an overestimate of the WTP for an increase in air quality.
4. For Policy 1, the researcher records the number of respondents for each category. For
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