EnvEcon 1 / Econ 3
Quiz 2
P. Berck
Fall 2006
Answer all four of the following questions in your blue book. Each of the four questions is worth
five points for a total of 20 points.
1. Define
A
B
C
D
E
New Source Performance Standards
Tradable pollution permits
Marginal cost
Economic profit
Long run competitive equilibrium
2. Assume a company has the following cost structure.
Quantity
0
1
2
3
4
5
Total
Cost
Total
Variable
Cost
10
Average
Total
Cost
Average
Variable
Cost
----
----
Marginal
Cost
5
9
4
22
34
38
NA
Please first fill the table. (3pt)
(1pt) If market price is 3, how many products will the company produce?
(1 pt) If market price is 12, how many products will the company produce?
Turn over the page for questions 3 and 4.
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3. A mill uses air and other inputs to produce paper.
70
Other Stuff
60
50
40
30
20
10
0
0
20
40
60
Air
Assume that the price of other stuff is $1. The price of air is $2.50.
(A) (1 pt) Draw an isocost line that represents $50 in expenditure.
(B) (2pt) The mill hires a new manager and sets a production goal, described by the isoquant in the
figure above. What is the least cost input bundle that can achieve this goal? What is the total cost
associated with this level of production?
(C) (2pt) If the mill does not change its production goal, what would the price of air need to be for 30
units of air to be a cost-minimizing choice? (Use the graph and explain clearly how you got your
answer.)
4. Use a graph and words to explain deadweight loss. Follow the step outlined below.
(A) Draw a supply and demand diagram for a firm and mark the equilibrium.
(B) (2pts) Assume that the firm's output is polluting and every unit of output leads to damage in amount
$t. Use this fact to add a curve to your diagram and explain what the firm’s output ought to be.
(C) What would be the deadweight loss if the firm produced as in (A) instead?
(D) Explain exactly what this deadweight loss is.
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