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Economics (1,055)
EC238 (54)
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Chapter

# Solutions+to+Practice+Problems+week+of+Jan+20-27.pdf

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School
Wilfrid Laurier University
Department
Economics
Course
EC238
Professor
Karen Huff
Semester
Fall

Description
Week of January 20-27 Practice Problems Practice Problems for Chapter 3, 4 and 5: Question 1 Suppose marginal damages due to industrial chlorine emissions into a river system are defined by the equation MD = 2E where E is the measure of pollution. Marginal abatement costs are defined by the equation MAC = 1000 - ½E (i) Calculate the pollution level in the absence of any pollution. If you were a policy maker and were asked to set a target for emissions reduction, how large a reduction would you guess ought to be pursued? (ii) Calculate the optimal level of pollution. How good was your guess? Answer to Question 1 (i) In the absence of any pollution, the firm will pollute up to the point where MAC = 0. The MAC curve shows the marginal benefit of pollution to the firm, and as long as it is positive it pays for the firm to pollute more. Set 1000 - ½E = 0 and solve to get E = 2000 units. (ii) The optimal pollution level (E*)occurs where MD = MAC. Set 2E = 1000 - ½E and solve for E, to get E* = 400. Pollution should be reduced in this case by 80 per cent (1600 units). Question 2 Now suppose that scientific evidence arises showing that the chlorine release is twice as damaging as previously thought: so the MD curve is actually MD = 4E Should you order emissions be cut in half (from 400 down to 200)? Or more? Why or why not? Answer to Question 2 Set 4E = 1000 - ½E and solve for E, to get E* = 222. Emissions should be cut by 44.5 per cent (178 out of 400). While marginal damages have doubled, further cuts in emissions increase the marginal cost of pollution abatement. Hence, it is not desirable to cut emissions by half, even though marginal damages have doubled. Week of January 20-27 Practice Problems Question 3 Suppose two firms, 1 and 2, have the following marginal abatement cost curves: MAC =1100 - 3 e1 MAC =250 - 2 e2 Find the least-cost allocation of emissions between the two firms that controls total emissions to 200 units. Answer to Question 3 We know that aggregate abatement costs between the two firms is minimized when their marginal abatement costs are equal (the equi-marginal
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