Econ

Problem Set 7

7.1 The production process for a chemical product X also generates toxic emissions that harm the environment. There is only one technology available to produce this chemical and there is only one firm producing this chemical. The table below shows the production information of this firm.

Output | Marginal private cost to the firm | Marginal damage to the environment |

1 | 3 | 0 |

2 | 4 | 0 |

3 | 5 | 1 |

4 | 6 | 2 |

5 | 7 | 3 |

6 | 8 | 4 |

7 | 9 | 5 |

8 | 10 | 6 |

9 | 11 | 7 |

The market demand for this chemical product X is Qd=24-P, where Qd is the quantity demanded and P is the price of X.

The corresponding marginal revenue is MR=24-2Q.

a. What are the market equilibrium price and quantity in the market of the chemical X when there is no correction for the externality? Briefly explain your answer.

b. What is the social efficiency output of the chemical X? Briefly explain your answer.

c. What should be the amount of emissions fee (dollar per unit) that will lead to the social efficiency output of the chemical X? Briefly explain your answer.

7.2 a. Assume that there are only two industries in Country H. Output and unit price for each industry are shown for three years in the following table. Year 1 is the base year.

Year | Output of Industry A (per kg) | Output of Industry B (per kg) | Price in Industry A (per kg) | Price in Industry B (per kg) |

1 | 2,000 | 20,000 | 20 | 2 |

2 | 4,000 | 40,000 | 22 | 4 |

3 | 6,000 | 60,000 | 24 | 6 |

(i) Calculate the nominal GDP and real GDP in each of the three years. Briefly explain your calculation.

(ii) Suppose that the nominal interest rate in Year 3 is 10%. What is the real interest rate in Year 3? Briefly explain your answer.

b. For the following transaction, state the possible effect both on China GDP and on any one or more of the four components of aggregate expenditure.

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