Name: ________________________________________________
ECNS 105
Problem Set 12
Turn this problem set in at the end of class.
1. Using the graphs below as a starting point, sketch any supply or demand changes that might occur as a
result of each scenario presented.
Muffins
Coffee
D
S
D
Price
Price
S
Quantity per period
Quantity per period
A. Coffee and Muffins are compliment goods sold at the SRO and Brewed Awakening on campus.
Suppose that these two coffee shops are the only place on campus to get coffee or muffins. Now,
Sola Café, a local bakery, has opened up a third shop on campus. They sell the most delicious
muffins in town. Ceteris paribus, what happens in the coffee and Muffin markets?
Pepsi
Sugar
S
D
Price
D
Price
S
Quantity per period
Quantity per period
B. Real sugar is only an input to Coke-a-cola, and is not an ingredient in Pepsi. If Coke and Pepsi are
substitute goods for one another. Pepsi launches a new campaign showing why they’re healthier
then Coke. Ceteris paribus, what happens in the markets for Sugar and for Pepsi?
2. After being in business for over a month, all things are looking good for Sola Café. With how good
business has been they are discussing raising their prices. They want to know if this is a good idea.
Answer the following questions.
A. Is demand for muffins likely to be elastic or inelastic? Justify your answer.
B. Based on your answer in part A., Is it a good idea for them to raise their prices? Why?
C. Based on your answer in part A., Draw a graph of the market for Muffins.
3. Recently, smoking was banned on the MSU campus. Smoking is an example of a ____ externality. Without
this intervention, the average smoker would produce ____ of smoking than is socially optimal, ceteris paribus.
a. social; a higher quantity
b. positive; a lower quantity
c. negative; a higher quantity
d. negative; a lower quantity
e. positive; a lower quantity
4) Suppose that the NFL decides to build its new stadium in LA. They feel that in order to be as successful as
possible, they must build it in a central location, so they decide to build it right next to a large housing
development known for housing new families with young children. Tailgaters and other game attendees tend
to become very rowdy come game day, and the noise level rises greatly.
Use the graph to analyze the private and social costs of the stadium’s operation.
New Stadium Market
$100.00
$90.00
Price per Ticket
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
0
5
10
15
20
25
30
35
40
45
50
Number of TIckets (in 1000's)
Marginal Social Cost
Marginal Cost
Demand
A. Suppose that 20K tickets are available. Would this be a socially efficient quantity? Why or why
not?
B. What is the marginal social cost for producing the socially efficient quantity of tickets?
C. Shade the area on the graph that represents the total cost of the externality at the socially efficient
volume.
5. In the city of Dirtville, there are two power companies, Hot House Power and Water Power. Both companies
face costs to reduce their pollution. Each of the power companies currently emits 5 tons of sulfur dioxide into
the atmosphere per period. The table below shows the marginal cost of abatement (cost to reduce emissions)
per ton for each plant.
Cost per Additional Ton Abated
1st ton abated
2nd ton abated
3rd ton abated
4th ton abated
5th ton abated
Hot House Power
$25
$100
$200
$300
$400
Water Power
$50
$75
$125
$175
$225
A. Which plant can abate all of its emissions for the lowest cost?
B. Suppose that people in Dirtville want the power industry to cut its sulfur dioxide emissions by 60%
(i.e., from 10 tons per period to 4 tons per period). If a new regulation restricts each firm to
emissions of no more than 2 total tons per period in Dirtville, what will be the cost of the
regulation?
C. Suppose that people in Dirtville want the power industry to cut its sulfur dioxide emissions by 60%
(i.e., from 10 tons per period to 4 tons per period). To do so, Dirtville sells 4 pollution permits,
each providing the right to emit 1 ton of SO2 per period. No emissions are allowed unless a
company holds a permit. What is the most likely equilibrium price of the permits?