DSME 1030 Problem Set B Instructions
Uploaded by
1155194824DSME 1030 Problem Set B Instructions
Uploaded by
1155194824Common questions
Powered by AIThe filter should be installed from a societal viewpoint because the net benefit to society is higher with the filter. Without the filter, total income for both parties is $54,000 ($44,000 for Eric Textiles + $10,000 for fishermen). With the filter, total income is $58,000 ($22,000 for Eric Textiles + $36,000 for fishermen), indicating a net gain of $4,000 to society .
The government could implement a Pigovian tax equal to the external cost to internalize the environmental damage. Alternatively, the government could impose regulations requiring the firm to install waste filtration systems, thereby reducing negative externalities. Finally, creating a cap-and-trade system where Eric Textiles buys pollution permits could also mitigate the issue and improve the market outcome .
With a 4% interest rate on her savings account, the opportunity cost of investing $250,000 increases. It yields $10,000 in forgone interest income compared to $5,000 at 2%. Combined with her forfeited salary of $200,000, her implicit costs rise, making her economic profit potentially negative. A student might argue Ellie should work in her friend's company because it offers a higher guaranteed return without risking capital or forgoing her salary .
Firework shows are public goods and face the free-rider problem, making it hard for the government to track individual benefits and charge accordingly. In contrast, hospital services, which have excludable and rival characteristics, make it easier to charge users directly. Additionally, the prospective externalities differ; firework shows' externalities are positive, whereas hospitals manage both positive (improved public health) and potential negative externalities (e.g., overconsumption due to low apparent costs).
In a free market, Eric Textiles over-produces because it does not have to bear the external costs of pollution. A supply and demand diagram would show the market output without addressing the negative externalities, leading to overproduction. The firm's marginal private cost (MPC) is lower than the marginal social cost (MSC), causing the firm to produce beyond the socially optimal quantity. The gap between MSC and MPC represents the external cost imposed on society, such as environmental damage affecting fishermen .
The free COVID-19 testing service provided by the government is a public good. This classification is based on non-excludability, as no one is excluded from receiving the service, and non-rivalry, since one person's use of the testing does not reduce availability to others. Public health benefits further substantiate it as a public good due to positive externalities associated with widespread testing .
To align with societal efficiency, New Balance Limited could adopt a strategy of price discrimination to better match the marginal cost with consumer valuation across segments. This might involve charging different prices to different consumers based on their willingness to pay, thereby increasing total output to socially optimal levels. Implementing policies to reduce production costs through innovation or negotiating regulatory changes to encourage competition might also achieve societal efficiency .
Firework shows are often under-supplied because they are characterized by non-excludability and non-rivalry – features of public goods. A diagram would illustrate the marginal social benefit (MSB) being greater than the marginal private benefit (MPB) at each quantity, showing that the market fails to account for the collective benefit, leading to lower supply than optimal. This causes a welfare loss represented by the difference between these curves .
Eric Textiles could potentially offer monetary compensation to the fishermen instead of installing the filter if the cost of compensation is lower than the cost of installing the filter. However, for compensation to work, it would require effective negotiation under the Coase Theorem, which assumes no transaction costs. Given no rights to pollute, fishermen have leverage, and agreeing on compensation might not be straightforward .
The "efficient scale" for Patty's Bakery is the quantity of cakes produced where the Average Total Cost (ATC) is minimized. It occurs at the output level where the firm's cost structure achieves optimal production efficiency, balancing fixed and variable costs. Identifying this involves analyzing the ATC curve to locate its lowest point, signifying the least cost per unit .