EEP101/ECON125 Spring 99Prof D. ZilbermanTA's: Malick/MarceauMIDTERMPart A: Numerical Questions1. Assume that the marginal cost (MC) of producing a good is given by MC = 20 + 3Q. Themarginal benefits (MB) are given by MB =120 – 2Q, and the marginal social benefits (MSB)are given by MSB = 120 – Q.a) Calculate the socially optimal level of output (Q*).b) Calculate the competitive equilibrium output (Qc) and the competitive equilibriumprice (Pc). Determine the deadweight loss (DWL).c) Determine the consumer surplus (CS) and the producer surplus (PS) under thecompetitive case.d) Assume that the government wants to subsidize production in order to fix theexternality problem. Determine the optimal unit subsidy.e) If the government imposes the subsidy found by you in part (d), by how much does thetotal external benefit change?2. Assume that you have the following information about the individual demands for a publicgood:High income: Ph = 40 – QLow income: PL = 20 – QAssume further that there is a total of 3 people in the “high income” group and a total of 2individuals in the “low income” group. Finally, assume that the marginal cost of producing thegood is given by: MC = 5Q.a) What is the efficient output level, Q*, of this public good?b) Calculate the total cost of providing Q*.c) What is the minimum uniform fee that a regulated concessionaire could charge eachperson just to cover its costs? Calculate the consumer surplus of a typical “lowincome” individual under this fee.d) What is the maximum uniform fee that an unregulated concessionaire could chargeeach person without excluding any individual from consuming the good? Determinethe concessionaire ‘s profits under this fee.e) What uniform fee would the unregulated concessionaire charge each person in order tomaximize profits?EEP101/ECON125 Spring 99Prof D. ZilbermanTA's: Malick/MarceauPart B: Essay QuestionsThis part of the exam asks you to write two separate essays on environmental issues. Youressays must have economic content and follow a logical, organized train of thought. You willfind it useful to spend a minute or two outlining your argument before beginning to write.Essay I.Motor vehicles, power plants, factories, chemical solvents, combustion products from variousfuels, and some consumer products release nitrogen oxide and volatile organic compoundgases that react with sunlight to produce ground-level ozone. Ground-level ozone is theprimary ingredient in smog and can have harmful effects on human health and theenvironment.In choosing between incentive-based instruments (taxes) and direct control measures(standards) to reduce ozone-causing pollution, what considerations would influence theEPA’s decision in favor of one type of policy or the other? Be sure to describe the welfareimplications under the two types of policies. (You may write your essay in terms of a genericpollutant if you don’t know much about smog.)Essay II.This month, the federal and California governments announced the purchase from PacificLumber Company/MAXXAM of 11 000 acres of forested land in and around HeadwatersGrove for $480 million. The site includes old-growth redwoods and provides habitat for anumber of listed endangered species. The area “will be managed as a nature preserve … topromote the health of the forest and all species within the forest.” While public access to thesite will be granted, the government reserves the right to limit that access in order to assistconservation.Write a brief report advising the government of the alternative techniques it could use to placea monetary value on the benefits from preserving the purchased land as a standing forest. Besure to describe how these techniques could be implemented, as well as the known pitfalls andpossible biases associated with each