1. Consider a small, isolated island with a coconut oil industry and three villages. Coconutoil can be produced at a constant per-unit cost of 50 pesos per liter. All the oil is soldin the villages, and due to the close proximity of the villages to each other, the retailprice in all three villages must be the same. The three villages' demand for coconut oilis given by the following indirect demand functions (where Q, is the amount of coconutoil (in liters) consumed by village i and P, is the price (in pesos per liter) that the peopleliving in village i are willing to pay for the marginal liter):P(Q1) = 210·유Q; P(Qa)-400Q2: P(Qa) = 600 –The production of coconut oil creates environmental damage, mostly via deforestationassociated with growing coconut trees, but also via water and air pollution from chem-icals used in the oil extraction industry. The marginal damage due to deforestation isMDF(Q) = 10 + +Q (pesos per liter of coconut oil produced), whereas the marginaldamage due to pollution is MDp(Q) = 10 (pesos per liter of coconut oil produced).(a'quantity ų to market price P.Don't forget the "kinks" that arise form the fact that not all villages are demanding oil at allprices.Find the aggregate demand function for coconut oil, linking aggregate(b)Find the aggregate marginal damage function.(c)in the coconut oil market taken in isolation (ignoring the effects of environmentaldamage). Call this output level Q.Find the level of coconut oil production that maximizes total surplus(d)(Q*), which maximizes total surplus after accounting for environmental damage.Find the socially optimal (truly efficient) level of coconut oil production(e)producers. What price will be charged (P.) and how much oil will be produced(Q.)?Suppose coconut oil on the island is produced by perfectly competitive(f)levels Q; and Q? Why?How does the competitive output level Q. compare to the benchmark(g)by introducing a per-unit tax on coconut oil production. Determine te, the level oftax (in pesos per liter) that achieves this goal.Suppose the government wants to implement the socially optimal level(h)in part (g) is put in place?What will be the competitive equilibrium price after the tax computed(i)tax in each village separately.Compute the quantities of coconut oil consumed before and after the(i)by the tax, and why?Based on your answer to part (i), which village was the most affected

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(a' quantity y to market price P. Find the aggregate demand function for coconut oil, linking aggregate Don't forget the "kinks" that arise form the fact that not all villages are demanding oil at all prices. (b) Find the aggregate marginal damage function. (c) in the coconut oil market taken in isolation (ignoring the effects of environmental damage). Call this output level Q;. Find the level of coconut oil production that maximizes total surplus

(a' quantity y to market price P. Find the aggregate demand function for coconut oil, linking aggregate Don't forget the "kinks" that arise form the fact that not all villages are demanding oil at all prices. (b) Find the aggregate marginal damage function. (c) in the coconut oil market taken in isolation (ignoring the effects of environmental damage). Call this output level Q;. Find the level of coconut oil production that maximizes total surplus

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter5: Elasticity Of Demand And Supply

Section: Chapter Questions

Problem 1.1P: (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of...

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