ECO 220 – Intermediate Microeconomics

Professor Mike Rizzo

FourthCOLLECTED Problem Set –This is an assignment that WILL be collected and graded. Please feel free to talk about the assignment with your friends or with your groupand I strongly encourage you to submit your assignment as a group.

Assigned:Monday, May 2nd

Due: Monday, May 9th

  1. Nicholson, Problem 16.5.
  2. Nicholson, Problem 16.6.
  3. Nicholson Problem 16.9. When you answer part (d) assume it is asking for a SINGLE price.
  4. Tony and Vito can live separately at a rent of $400/mo. each or together at a rent of $600. Each would be willing to give up $30/mo. to avoid having to give up his privacy. In addition to the loss of privacy, joint living produces two other conflicts, namely each has a particular behavior the other finds offensive. Vito is a horrible harmonica player and Tony chews his toenails. Vito would be willing to pay $60/mo. rather than tolerate the disgusting foot habits of Tony and $120/mo. to continue playing his harmonica. Tony, for his part, would pay up to $100/mo. to be able to continue his foot habit and $90/mo. to avoid listening to a wanna-be Bob Dylan. Will they live together? Explain carefully. Would your answer be different if Tony didn’t mind giving up his privacy?
  5. Smith can operate his sawmill with or without soundproofing. Operation without soundproofing results in noise damage to his neighbor Jones. The relevant gains and losses for Smith and Jones are listed in the table:

Without Soundproofing / With Soundproofing
Gains to Smith / $150 / wk / $34 / wk
Damage to Jones / $125 / wk / $6 / wk
  1. If Smith is NOT liable for noise damage and there are no negotiation costs, will he install soundproofing? Explain.
  1. How, if at all, would your answer differ if the negotiation costs of maintaining an agreement were $4 / wk? Explain.
  1. Now suppose Jones can escape the noise damage by moving to a new location which will cost him $120 / wk. With negotiation costs again assumed to be zero, how, if at all, will your answer to part (a) differ? Explain.
  1. Once a week Smith purchases a 6-pack of Dr Pepper (why no period after doctor?) and puts it in the refrigerator for his two children to drink later. He invariably discovers that all six cans get drunk the first day. Jones also purchases a 6-pack of Pepper once a week for his two children, but unlike Smith, he tells than that each may drink no more than three cans. Explain why the cola lasts much longer at Jones’s house than at Smith’s?
  1. (You should take a derivative to solve this problem) A small village has 6 people. Each can either fish in a nearby lagoon or work in a factory. Wages in the factory are $4 / day. Fish sell in competitive markets for $1 apiece. If L persons fish the lagoon, the total number of fish caught is given by:
    F = 8L-2L2. People prefer to fish unless they expect to make more money working in the factory.
  2. If people decide individually whether to fish or work in the factory, how many will fish? What will be the total earnings for the village?
  3. What is the socially optimal number of fishermen? With that number, what will the total earnings of the village be?
  1. Why is there a difference between the equilibrium and socially optimal numbers of fishermen?
  1. Two firms, X and Y, have access to five different production processes, each one of which gives off a different amount of pollution, The daily costs of the processes and the corresponding number of tons of smoke are listed below:

Process / A / B / C / D / E
(smoke) / (4 tons/day) / (3 tons/day) / (2 tons/day) / (1 ton/day) / (0 tons/day)
Cost to firm X / 100 / 120 / 140 / 170 / 220
Cost to firm Y / 60 / 100 / 150 / 255 / 375
  1. If pollution is unregulated, which process will each firm use, and what will be the total daily smoke emissions?
  1. The city council wants to cut smoke emissions by half. To accomplish this, it requires a municipal permit for each ton of smoke emitted and limits the number of permits to the desired level of emissions. The permits are then auctioned off to the highest bidders. If X and Y are the only polluters, how much will each permit cost? How many permits will X buy? How many will Y buy?
  1. Compare the total cost to society of this permit auction procedure to the total cost of mandating that each firm reduce emissions by half.

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