ASSIGNMENT 5: DUE 4.00PM, 4/09/08
1. A competitive firm uses coal to generate electricity. Its supply curve is Q = 300P
- 1000, where Q is quantity produced (units of electricity per year), and P is
market price of electricity per unit. The production of each unit of electricity
results in a tonne of sulphur dioxide emissions which is estimated to cost the
economy $31. If the market price of electricity is $45 per unit, what is the
optimal level of output from the viewpoint of:
a. The firm? [2 marks]
b. The economy as a whole? [2 marks]
c. If the firm is producing the economy¡¯s optimal output level, what price
should be used to represent the value of an extra unit of output of electricity
to the economy as a whole? [2 marks]
[6 marks]
2. Assuming that shoes have a world price of US$60 a pair, that the EU has a 45%
ad valorem import duty on footwear which applies to all types of footwear and
an Italian company is proposing a project to substitute 150,000 pairs of
imported shoes by domestically produced shoes. The annual cost of the project
(operating cost plus annual equivalent capital cost) at both market and
efficiency prices are $9.4 millions. Apart from the tariff there are no other
distortions to the EU domestic price of shoes. Calculate the net annual benefit
of the project:
a. At market prices. [2 marks]
b. At efficiency prices. [2 marks]
3. An ad valorem tax of 15% applies to sports shoes which have a market price
(i.e. price including the tax) of $46 per pair. What price (give the value in
dollars) should be used for a pair of sport shoes in an efficiency benefit-cost
analysis under each of the following sets of circumstances: [0.25 mark each]
a. The tax is distortionary and the commodity is a project output which
replaces existing supply;
b. The tax is distortionary and the commodity is a project output which satisfies
additional demand;
First do a little research, then take a shot. What do you think?
don get it
why don't you post your solution,perhaps i can refer . i need to pass up by tomorrow
To answer these questions, we need to understand the concepts of supply and demand, as well as the effects of taxes and tariffs on prices and output levels.
1. Optimal level of output:
a. From the viewpoint of the firm, the optimal level of output is where the firm maximizes its profit. To find this, we need to determine the quantity at which marginal cost (MC) equals marginal revenue (MR). In this case, the supply curve is given as Q = 300P - 1000. To find the MC, we need to calculate the derivative of the supply curve: MC = dQ/dP = 300. Since the firm operates in a competitive market, MR is equal to the price, which is $45. Equating MC and MR, we have:
300 = 45
Solving for Q, we get Q = 45. Therefore, the optimal level of output for the firm is 45 units.
b. From the viewpoint of the economy as a whole, the optimal level of output is where social welfare is maximized. In this case, we need to consider the cost of sulfur dioxide emissions. Each unit of electricity produced results in a tonne of sulfur dioxide emissions that cost $31. To find the optimal level of output for the economy, we need to calculate the marginal social cost (MSC), which includes the marginal private cost (MPC) and the cost of emissions. MPC is equal to MC, which is 300 as calculated in part (a). MSC = MC + cost of emissions = 300 + 31 = 331. To find the optimal level of output, we need to find the quantity at which MSC equals the market price ($45). Setting MSC equal to $45, we have:
331 = 45
Solving for Q, we get Q = 45. Therefore, the optimal level of output for the economy as a whole is also 45 units.
c. If the firm is producing the economy's optimal output level, the price that should be used to represent the value of an extra unit of output of electricity to the economy as a whole is the market price, which is $45.
2. Net annual benefit of the project:
a. At market prices, the net annual benefit of the project can be calculated by subtracting the cost (operating cost plus annual equivalent capital cost) from the revenue generated by selling domestically produced shoes. Without any further information, we cannot calculate the revenue, and therefore cannot determine the net annual benefit of the project at market prices.
b. At efficiency prices, the net annual benefit of the project can be calculated by considering the effects of the tariff on prices and output. The tariff adds an additional cost to imported shoes, making domestically produced shoes relatively cheaper. Since the project aims to substitute 150,000 pairs of imported shoes, the net annual benefit at efficiency prices can be calculated by multiplying the price difference between domestically produced shoes and imported shoes ($60 - tariff cost) by the quantity substitution (150,000). Without knowing the actual tariff cost or the price of domestically produced shoes, we cannot calculate the net annual benefit of the project at efficiency prices.
3. Price for efficiency benefit-cost analysis:
a. If the tax is distortionary and the commodity is a project output which replaces existing supply, the price used for a pair of sports shoes in the efficiency benefit-cost analysis should be the market price minus the tax. Given that the market price is $46 and the tax is 15%, the price used for the analysis would be $46 - (0.15 * $46) = $39.10.
b. If the tax is distortionary and the commodity is a project output which satisfies additional demand, the price used for a pair of sports shoes in the efficiency benefit-cost analysis should be the market price inclusive of the tax. In this case, the market price is already inclusive of the tax, so the price used for the analysis would be $46.