The impact of anticipated inflation and unanticipated inflation. Concept Introduction: Inflation: Inflation is the rate at which the common price level for goods and services are increasing. Anticipated inflation: When accurate prediction about inflation can be made then this type of inflation is known as anticipated inflation. This type of inflation has lesser impact on the common people as they can take the precautionary measures. Unanticipated inflation: Unanticipated inflation is the inflation that happens all of a sudden and cannot be predicted beforehand. This type of inflation has a larger impact on the common people as they cannot take any precautionary measures.

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 7, Problem 4.10PA

To determine

The impact of anticipated inflation and unanticipated inflation.

Concept Introduction:

Inflation: Inflation is the rate at which the common price level for goods and services are increasing.

Anticipated inflation: When accurate prediction about inflation can be made then this type of inflation is known as anticipated inflation. This type of inflation has lesser impact on the common people as they can take the precautionary measures.

Unanticipated inflation: Unanticipated inflation is the inflation that happens all of a sudden and cannot be predicted beforehand. This type of inflation has a larger impact on the common people as they cannot take any precautionary measures.

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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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