ASSIGNMENT 5: DUE 4.00PM, 4/09/08
1. A competitive firm uses coal to generate electricity. Its supply curve is Q = 300P
- 1000, where Q is quantity produced (units of electricity per year), and P is
market price of electricity per unit. The production of each unit of electricity
results in a tonne of sulphur dioxide emissions which is estimated to cost the
economy $31. If the market price of electricity is $45 per unit, what is the
optimal level of output from the viewpoint of:
a. The firm? [2 marks]
b. The economy as a whole? [2 marks]
c. If the firm is producing the economy¡¯s optimal output level, what price
should be used to represent the value of an extra unit of output of electricity
to the economy as a whole? [2 marks]
[6 marks]
2. Assuming that shoes have a world price of US$60 a pair, that the EU has a 45%
ad valorem import duty on footwear which applies to all types of footwear and
an Italian company is proposing a project to substitute 150,000 pairs of
imported shoes by domestically produced shoes. The annual cost of the project
(operating cost plus annual equivalent capital cost) at both market and
efficiency prices are $9.4 millions. Apart from the tariff there are no other
distortions to the EU domestic price of shoes. Calculate the net annual benefit
of the project:
a. At market prices. [2 marks]
b. At efficiency prices. [2 marks]
3. An ad valorem tax of 15% applies to sports shoes which have a market price
(i.e. price including the tax) of $46 per pair. What price (give the value in
dollars) should be used for a pair of sport shoes in an efficiency benefit-cost
analysis under each of the following sets of circumstances: [0.25 mark each]
a. The tax is distortionary and the commodity is a project output which
replaces existing supply;
b. The tax is distortionary and the commodity is a project output which satisfies
additional demand;
3 answers
1 answer