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Question: short questions question 1 demand and supply curves 20 points...

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Short Questions Question 1. Demand and Supply Curves (20 points) Explain why a demand curve can be considered a marginal benefits curve and why the total benefits from the consumption of a good corresponds to the area under its demand curve. (10 points Explain why a supply curve is equivalent to a marginal cost curve and why the total variable cost of producing a good corresponds to the area under its supply curve. (10 points) a. b. Question 2. Economic Efficiency and Market Failure (20 points) Describe a situation in which you would expect the free market to result in an efficient outcome. (10 points) Describe a situation in which you would not expect the free market to result in an efficient outcome. (10 points) a. b.
Question 3. (Bonus): Economic Efficiency and Wilderness Protection (20 points) Advocates for wilderness protection have often criticized the common practice of setting aside rock and ice (i.e., alpine areas) as protected lands, while more productive bottomland areas (along river valleys, for example) are typically left in agriculture and other intensive use. In general, the bottomland areas would also provide richer species habitat than the alpine areas. What are the pros and cons of setting aside rock and ice for conservation rather than bottomland areas from the perspective of economic efficiency? (20 points)
Long Questions Question 4. Externality Problem (40 Points) This question follows from example in class of an electric power plant that emits Sulfur Dioxide and can only reduce its emissions by reducing output. Assume the following: Demand for electrical power is given by equation: MB 100-Q, where MB is marginal benefits and Q is quantity of electricity produced The private marginal cost of the electric power plant is MPC-0.5.a This is the market supply equation. The marginal external cost of sulfur dioxide is: MEC-$25. . . Questions On a graph, show the demand, supply, and external costs of power production. Depict the free market equilibrium on the graph. (10 points) Calculate consumer surplus, producer surplus, and total external cost in the free market equilibrium. Calculate the total net benefits from production in the free market equilibrium. (10 points) Depict the social marginal cost curve (MSC) on the graph (MSC- MPC + MEC). Depict the efficient level of energy production on the graph. (10 points) Calculate consumer surplus, producer surplus, and total external cost at the efficient level of energy production. Calculate the total net benefits from production at the efficient level of production. How do the total net benefits in this case compare to those in the free market equilibrium? (10 points) Bonus: Explain why is would not be desirable (from the point of view of economic efficiency) to eliminate all emissions of Sulfur Dioxide from the electric power plant. (10 points) a. c. d. e.
Question 5. Abatement Costs and Benefits (40 Points) This problem is based on Jackie Prince Roberts, Aracuz Cellulose, S.A., Havard Business School Case 9 794-049 (lanuary 1995), pp. 28. A Brazillian pulp mill is considering whether to upgrade its environmental controls to reduce emissions of AOX (Adsorbable Organic Halides) compounds associated with producing a given quantity of pulp. AOX compounds arise when chlorine-containing chemicals used in bleaching react with wood fiber Table 1 below depicts the total pollution level, the corresponding abatement, the total cost, and the marginal abatement cost associate with four possible abatement strategies available to Aracuz Cellulose: 1. Do nothing. 2. Switch to elemental chlorine free (ECF) methods using chlorine dioxide. 3. Implement 2. plus adding an oxygen delignification stage to reduce lignin content in pulp before bleaching 4. Implement 2. and 3. plus eliminating use of chlorine by using peroxide as a substitute bleaching agent. Table 1. Aracuz Cellulose Abatement Cost Function Alternative AOX Pollution Incremental Total Annual Increase in Marginal Cost (ks per year) Abatement Cost (USD) Total Annual (per KG of D Nothing500007 1,000,000 250,000 (kg per year No reduction SO 750,000 $2.85 milion $2.85 milion $3.80 Cost S0 abatement) $0 2. ECF Methods 3. ECR+ oxygen delignification 4. TCF+ oxygen delignification +peroxide $3.95 mlilon $1.1 million $22 200,000 50,000 10,000 190,000 $14.59 million $10.64 million $56 Questions: Draw the abatement cost curve and the marginal abatement cost curve for Aracruz Celulouse (20 points) Suppose that a study finds that that the marginal benefits from reducing pollution chlorinated organic compounds in the effluent from pulp mills is $25 per kilogram. Which pulping technology would be most efficient in this case С.е., 2., 3., or 4.)? what would be the resulting total costs associated with pollution abatement? What would be the total benefits? (20 points) a. b.
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