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chapter 8.doc

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Simon Fraser University
ECON 260
Chris Bidner

Answers to Chapter 8 Analytical Problems 1. Suppose that site A and B both give the same benefits in terms of use as a water treatment plant (and all other uses). Using site A has an opportunity cost of $200,000 (what it would sell for) while site B has an opportunity cost of $150,000 (the purchase price). Hence, site B should be used. There may be other factors to consider. If the life of the plant has a limited time span and a completely new plant can be built in 10 years, then in ten years if the land on site A is expected to increase in value relative to site B (more than $50,000), then site A would be the best choice. Other factors include the current use of site A. Suppose site A is a park that gives value to the city (estimated to be more than $50,000), then use of site A would involve a opportunity cost of more than $50,000 making site B the preferred choice. 2. The inverse demand curve is P=90-1.5Q. The original supply curve is MC = 0.50 with a supply curve after the regulation of MC1=10+0.5Q. Before the regulation the price is $22.5 and the equilibrium quantity is 45 units. After the regulation MC increases to MC = 10+0.5Q so that the price increases to $30 and equilibrium 1 quantity falls to 40. Initially the producer surplus is $506.25, the consumer surplus is $1518.75 and the total private surplus is $2025. After the regulation, producer surplus falls to $400 as the quantity falls proportionately by more than the price increase. The rise in price and fall in quantity demanded results in a new consumer surplus of $1200. Loss in CS is $318.75 (area a+b+c). Loss in PS is 106.25 (area (d+e+f)-(d+a)). Total private surplus loss is area (a+b+c) + (d+e+f)-(d+a)= area(b+c+e+f). $ 90 MC(after regulation) P1=30
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