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B.
i.
ii.
iii.
C.
2.
46/30= 1.53
C. FG = 32/30 = 1.07
D. CG = -35/30 = -1.167
E. FG = -27/30 = -0.9
3.
A.
Home-work 2 Nahom Regassa-nmr5442@psu.edu
B. The fact that the government decided to raise the estimate of the social damage implies that
the current level of production is beyond the social optimal cost. Hence, the new estimates
would raise the costs of production to the optimal level and make it more efficient. Simply
meaning that the final price considers all the opportunity costs.
C. The new estimates imply a higher rate of Pigouvian tax because these taxes are applied to
supplement for lower estimates of the social cost. Because governments use the Pigouvian Tax to
convert the negative externalities of social costs into monetary values, a higher estimate of the
4.
A.
B. Yes, I would recommend that the seller increase the price since the price elasticity of demand
is inelastic at this point. This means that the seller can increase his/her price without losing a
C. I would not recommend a price increase, since the demand is unit elastic at this point. A
D. I would not recommend a price increase because the demand is elastic at this point. Any
increase in price would significantly lower the quantity demanded and reduce Total revenue.
5.
A.
p=1/slope* P/Q
=1/-0.25*6/48 = -0.5
B.
p= 1/slope *P/Q
= -5
C. Yes, I would recommend that the seller increases his/her price since the demand is inelastic at
6$. Total revenue would increase because the price increases and the quantity demanded
6. I agree with the proposal because demand is inelastic at this point. An increase in price
would only decrease the quantity demanded by a small margin. The increase in price would
outweigh the decrease in quantity demanded and thus increase Total Revenue.