Q:
Is the graph correct in the solution Question A-3a (Bloomberg Congestion case) of the 2007 practice exam? If so, what does the curve shown indicate?
A:
The graph is correct…the curve shown represents the demand for driving in New York…some people value driving in the city a lot, and others not so much, so we get the typical downward sloping demand curve…the supply in this case is drawn as being perfectly elastic, with the original supply curve being a dotted horizontal line at the marginal private cost of driving in the city (gas, etc.) and the marginal social cost is the higher horizontal line. Given this, the graph is just like the externality graphs that you saw in class.
Thursday, December 13, 2007
Valley of the Locusts
Q:
I don't understand Fall 2006 Final Exam - Part 3. 2. Valley of the Locusts (e) because $25 and $75 payments don't look rational.
A:
Ok, so the quantity is 50 because that is the socially optimal quantity, and the price is still at $100. I disagree with the answer in the solutions(!). For a quantity of 50, M would be willing to pay 120-50=$70. Similarly, L would be willing to pay 80-50=$30. This $70+$30 covers the cost of the bugs and is what I would suggest. I am not sure where the $75 and $25 comes from.
I don't understand Fall 2006 Final Exam - Part 3. 2. Valley of the Locusts (e) because $25 and $75 payments don't look rational.
A:
Ok, so the quantity is 50 because that is the socially optimal quantity, and the price is still at $100. I disagree with the answer in the solutions(!). For a quantity of 50, M would be willing to pay 120-50=$70. Similarly, L would be willing to pay 80-50=$30. This $70+$30 covers the cost of the bugs and is what I would suggest. I am not sure where the $75 and $25 comes from.
Mosquito Control
Q:
I have a question about "Problem Set 10 - 1. Public Goods (Mosquito
Control)."
When I see (d), the answer says that the total benefit ro Adam and Beth is $16,667 and $33,334 respectively, but I don't understand this part. It is not the exact area under their respective marginal benefit curve - we have to calculate the trapezoid area like the followings -> 0.5 * (400 + about 60) * 166.67 for Beth.
A:
I think you are right. The answer in the solution would give a triangle that assumes the people would be paying a positive price for the good, when in the context of the problem they are getting it at a price of zero.
I have a question about "Problem Set 10 - 1. Public Goods (Mosquito
Control)."
When I see (d), the answer says that the total benefit ro Adam and Beth is $16,667 and $33,334 respectively, but I don't understand this part. It is not the exact area under their respective marginal benefit curve - we have to calculate the trapezoid area like the followings -> 0.5 * (400 + about 60) * 166.67 for Beth.
A:
I think you are right. The answer in the solution would give a triangle that assumes the people would be paying a positive price for the good, when in the context of the problem they are getting it at a price of zero.
Demand and MR Again
Q:
The question 1 in Part 3
Internet Browsers
How to draw and calculate the Marginal Revenue based on the Demand Curve??
A:
Graphically, the marginal revenue curve has the same P-axis intercept as the demand curve and is twice as steep (i.e. has a slope twice as large in absolute value). Mathematically, the easiest way to find it is to solve for P in the demand curve and then multiply the slope by 2. For example:
Qd = 40-2P
2P = 40-Qd
P = 20-Qd/2
so then MR = 20-Q, and you can go back and solve for Q.
The question 1 in Part 3
Internet Browsers
How to draw and calculate the Marginal Revenue based on the Demand Curve??
A:
Graphically, the marginal revenue curve has the same P-axis intercept as the demand curve and is twice as steep (i.e. has a slope twice as large in absolute value). Mathematically, the easiest way to find it is to solve for P in the demand curve and then multiply the slope by 2. For example:
Qd = 40-2P
2P = 40-Qd
P = 20-Qd/2
so then MR = 20-Q, and you can go back and solve for Q.
Pollution Abatement
Q:
Wondered if you might clarify the chart on p. 5 of Tony's hand-out notes for Class 22. I don't understand the "source of last ton" column, nor the relationship between the Total Costs of the individual plants and the Combined Least Cost.
A:
I will try my best to clarify. If your goal is to clean up tons of pollution at least cost, as in this problem, you can think of this as answering the questions: For whom is it cheapest to clean up the first ton? Okay, have them clean up one ton...now, given that, for whom is it cheapest to clean up the second ton? Okay, have them clean up a ton, and so on.
In this example, it is cheapest to have A clean up the first ton. Given that, the relevant costs for cleaning up the second ton are the marginal costs of the first ton for B (since it hasn't cleaned up at all yet) and the marginal cost of the second ton for A (since it has already cleaned up one ton). A is still cheaper, so it cleans up the second ton and the process repeats. Eventually it becomes cheaper for B to start cleaning up. Tou can get the total cost by just adding up the marginal costs for each ton based on which plant cleans it up.
Wondered if you might clarify the chart on p. 5 of Tony's hand-out notes for Class 22. I don't understand the "source of last ton" column, nor the relationship between the Total Costs of the individual plants and the Combined Least Cost.
A:
I will try my best to clarify. If your goal is to clean up tons of pollution at least cost, as in this problem, you can think of this as answering the questions: For whom is it cheapest to clean up the first ton? Okay, have them clean up one ton...now, given that, for whom is it cheapest to clean up the second ton? Okay, have them clean up a ton, and so on.
In this example, it is cheapest to have A clean up the first ton. Given that, the relevant costs for cleaning up the second ton are the marginal costs of the first ton for B (since it hasn't cleaned up at all yet) and the marginal cost of the second ton for A (since it has already cleaned up one ton). A is still cheaper, so it cleans up the second ton and the process repeats. Eventually it becomes cheaper for B to start cleaning up. Tou can get the total cost by just adding up the marginal costs for each ton based on which plant cleans it up.
A Logistical Point
Q:
What is the location of the exam?
A:
The information can be found in the exam memo on the course web site rather than in the announcements directly:
Last names A through F: Weiner Auditorium (Ground Floor of Taubman)
Last names G through Z: Land Hall (Belfer Building)
What is the location of the exam?
A:
The information can be found in the exam memo on the course web site rather than in the announcements directly:
Last names A through F: Weiner Auditorium (Ground Floor of Taubman)
Last names G through Z: Land Hall (Belfer Building)
MC and MR
Q:
When is D=MR and S=MC, and when are they different? Is it only in the competitive price-taker situation when they are equivalent?
A:
Supply is a truncated version of the marginal cost curve (above the shut-down condition) in a COMPETITIVE market. Demand equals marginal revenue when demand is perfectly elastic (i.e. horizontal). So the answer to your second question would be yes, unless for some bizarre reason market demand were randomly perfectly elastic.
When is D=MR and S=MC, and when are they different? Is it only in the competitive price-taker situation when they are equivalent?
A:
Supply is a truncated version of the marginal cost curve (above the shut-down condition) in a COMPETITIVE market. Demand equals marginal revenue when demand is perfectly elastic (i.e. horizontal). So the answer to your second question would be yes, unless for some bizarre reason market demand were randomly perfectly elastic.
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