Homework 3

Name:_____Solutions_______

FE345: ENVIRONMENTAL ECONOMICS

Assignment 3: Due Wednesday 9/10/14

• Make sure you show your work and that ALL answers are complete and neatly written.

• Make sure your name is on the front page and all pages are stapled together.

• Only work that follows these instructions and represents a “Good Faith Effort” to answer the questions posed will receive a check. (Copying answers from a classmate without working through the problems is unacceptable conduct).

• Stop by during my office hours (MWF4, T10) if you have questions, or set up another time to meet with me.

Answer the following:

(Many of the questions are easier if you sketch a supply and demand diagram).

1. Assume the U.S. corn market is perfectly competitive and the yearly market demand (marginal benefit) for corn is approximated by:

[pic]

where P is the price per bushel, and Q is the total yearly quantity demanded (in billions of bushels). The supply (marginal cost) of corn is given by:

[pic]

Given the information above, answer the following questions:

a) Show (by solving) that the free market competitive equilibrium price is $7 and quantity of corn exchanged is 20 (billion) bushels per year.

Set supply = demand (MB=MC) and solve:

11 – 0.2Q = 1 + 0.3Q

10 = 0.5Q

QE = 20 billion bushels

PE = (11 – 0.2*20) = $7 per bushel

b) Calculate the consumer surplus (CS) and producer surplus (PS) in the corn market at the free market equilibrium. Show that total net benefits are $100 billion per year.

CS = ½ * 20 * 4 = $40 billion per year

PS = ½ * 20 * 6 = $60 billion per year

Total net benefits = CS + PS = $100 billion

2. Agricultural income support programs can take many forms. Using the same market supply and demand curves as in question 1, consider the impact of the following programs on the corn market:...