Connect Access Card for Managerial Econnomics
Connect Access Card for Managerial Econnomics
9th Edition
ISBN: 9781259354335
Author: Michael Baye, Jeff Prince
Publisher: McGraw-Hill Education
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Chapter 3, Problem 2CACQ

The demand curve for a product is given by Q x d = 1 , 200 3 P x 0.1 P z where P z = $ 300 .

  1. What as the own price elasticity of demand when P x = $ 140 ? Is demand elastic or inelastic at s price? What would happen to the firms revenue if it decided to charge a price below $140?
  2. What is the own price elasticity of demand when P x = $ 240 ? Is demand elastic or inelastic at s price? What would happen to the firms revenue if it decided to charge a price above $240?
  3. What is the cross-price elasticity of demand between good X and good Z when P x = $ 140 ? Are goods X and Z substitutes or complements?

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"Whether the regulator sells or gives away tradeable emission permits free of charge, the quantities of emissions produced by firms are the same." Assume that there are n identical profit-maximising firms where profit for each firm is given by π(e) with л'(e) > 0; π"(e) < 0 and e denotes emissions. Individual emissions summed over all firms gives E which generates environmental damages D(E). Show that the regulator achieves the optimal level of total pollution through a tradeable emission permit scheme, where the permits are distributed according to the following cases: Case (i) the firm purchases all permits; Case (ii) the firm receives all permits free; and Page 3 of 5 ES30031 Case (iii) the firm purchases a portion of its permits and receives the remainder free of charge.
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