The Consumer equilibrium in two commodity case given the prices of goods and his budget. Concept Introduction: Consumers Equilibrium: In order to maximize his utility, the consumer will spend his income in such a way so that the following condition is satisfied: MU from good ' x ' Price of good ' x ' = MU from good ' y ' Price of good ' y '

Question

3. Consider the market for paper. The process of producing paper creates pollution. Assume that the marginal damage function for pollution is given by: MDF = 3E where damages are measured in dollars and E is the level of emissions. Assume further that the function describing the marginal abatement cost of emissions is given by MAC 120-E where benefits are measured in dollars and E is the level of emissions. a. Graph the marginal damage function (MDF) and the marginal abatement cost function (MAC). b. What is the unregulated level of emissions Eu? What is the social welfare of this emissions level? c. Assume an existing emission quota limits emissions to E = 60. Show on the graph why this policy is inefficient. What is the deadweight loss caused by this policy?

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Question

Chapter 6, Problem 2.5P

To determine

The Consumer equilibrium in two commodity case given the prices of goods and his budget.

Concept Introduction:

Consumers Equilibrium: In order to maximize his utility, the consumer will spend his income in such a way so that the following condition is satisfied:

$\frac{MU from good' x'}{Price of good' x'} = \frac{MU from good' y'}{Price of good' y'}$

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3. Consider the market for paper. The process of producing paper creates pollution. Assume that the marginal damage function for pollution is given by: MDF = 3E where damages are measured in dollars and E is the level of emissions. Assume further that the function describing the marginal abatement cost of emissions is given by MAC 120-E where benefits are measured in dollars and E is the level of emissions. a. Graph the marginal damage function (MDF) and the marginal abatement cost function (MAC). b. What is the unregulated level of emissions Eu? What is the social welfare of this emissions level? c. Assume an existing emission quota limits emissions to E = 60. Show on the graph why this policy is inefficient. What is the deadweight loss caused by this policy?

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