PMG Classes
An Initiative of P. MANOJ GARG
Eco(H) Sem-4 MICRO ECONOMICS
Numericals on Externalities
Ques 1 : With well-defined property rights , a pareto efficient allocation can be achieved even in the good
that involves consumption externality?
Ques 2: Suppose a firm ‘C’ produces a positive amount of ‘good A’ and some pollution level which
adversely affects production of another commodity ‘F’ .
a. What is the privately optimal level of pollution?.
b. What is the socially optimal level of pollution?
Gives the equilibrium condition in each case.
Ques 3: Can pigouvian taxes be used to solve the problem of a negative production externality? What
other methods can be used to achieve the same result?
Ques 4 : Steel firm A is situated along the banks of a river . Further down-stream is fishery B .the cost
function of A is given by CA(s,x)=5 + , where s denotes the quantity of pollutants that A dumps
into the river in a given year. The cost functionof fishery B is CB= +2X, where f denotes the quantity of
fish caught in a given year.
Suppose that the unit price of fish is Rs .10 , Assume that both firms behave competitively in the output
market and take the price of their output as given .
a. Compute the profit maximumizing quantity of steel and pollutants produced by A.
b. Compute the profit maximizing quantity of fish caught by B.
PMG Classes
Whatsapp ONLY - 9899312641
PMG Classes
An Initiative of P. MANOJ GARG
c. Suppose that the two firms A and B merge. Find the quantities of steel, fish and pollutants that the
new firm produces.
Ques 5 : The picturesque village of Horsehead, Massachusetts, lies on a bay that is inhabited by the
delectable crustacean, homarus americanus, also known as the lobster. The town council of Horsehead
issues permits to trap lobsters and is trying to determine how many permits to issue. The economics of the
situation is this:
1. It costs $2,000 dollars a month to operate a lobster boat.
2. If there are x boats operating in Horsehead Bay, the total revenue from the lobster catch per month will
be f(x) = $1, 000(10x - x2).
(a) AP(x) =f(x)/x, and the marginal product, MP(x) = 10000-2 000x. In the same graph, plot the
line indicating the cost of operating a boat.
(b) If the permits are free of charge, how many boats will trap lobsters
in Horsehead, Massachusetts?
(c) What number of boats maximizes total profits?
(d) If Horsehead, Massachusetts, wants to restrict the number of boats to the number that
maximizes total profits, how much should it charge per month for a lobstering permit?
Ques 6: California, population 1,001, there is not much to do except to drive your car around town.
Everybody in town is just like everybody else. While everybody likes to drive, everybody complains about
the congestion, noise, and pollution caused by trac. A typical resident's utility function is U(m; d; h) =
m+16d−d^2−6h/1000, where m is the resident's daily consumption of Big Macs, d is the number of hours
per day that he, himself, drives, and h is the total amount of driving (measured in person-hours per day)
done by all other residents of El Carburetor. The price of Big Macs is $1 each. Every person in El Carburetor
has an income of $40 per day. To keep calculations simple, suppose it costs nothing to drive a car.
(a) If an individual believes that the amount of driving he does won't affect the amount that others
drive, how many hours per day will he choose to drive?
(b) If everybody chooses his best d, then what is the total amount h of driving by other persons?
(c) What will be the utility of each resident?
(d) If everybody drives 6 hours a day, what will be the utility level of a typical resident of El Carburetor?
PMG Classes
Whatsapp ONLY - 9899312641
PMG Classes
An Initiative of P. MANOJ GARG
(e) Suppose that the residents decided to pass a law restricting the total number of hours that anyone
is allowed to drive. How much driving should everyone be allowed if the objective is to maximize the utility
of the typical resident?
Ques 7: Explain how the output of a negative externality producing industry remain high under a market
determined equilibrium in relation to the socially optimal level.
Ques 8: An industry generates waste in the course of production thus imposing external costs on third
parties . The demand curve for the product is P=24-Q , where P and Q are the prices and quantity
respectively. The private marginal cost curve is PMC=2+Q, and the external costs is 0.5Q.
a) What are the equilibrium price and quantity of the product when there is no correction for the
externality?
b) What is the socially optimal output?
c) How much tax should be levied to achieve the socially efficient level of output?
Ques 9: What is the pollutions right? Does yhe optimal production and pollution depend on the initial
assignment of the right?
Ques 10 : In the village , there is a lake filled with lobsters. The council issues permit to the people t trap
lobsters . They want to determine how does it work . The economic conditions are
i. Rs. 2000 per month to operate the boat.
ii. The total revenue is f(x)=1000(10x- ) where x is the number of boats in the lake .
Solve for followings.
a) Derive the AP,MP.
b) If there is no permit charge ,how many boats will trap lobsters?
c) What numbers of boats maximizes the total profits?
d) If the council wants to restrict the number of boats that maximizes total profits then how much it
should charge per month for lobster permit?
Ques 11: A honey firm is located near an apple orchard and they both are comprtitive firms . Cost function
of the honey firm is cost= /100 and apple is -H.
The prices of honey and apple are Rs. 2 and Rs.3 respectively .
PMG Classes
Whatsapp ONLY - 9899312641
PMG Classes
An Initiative of P. MANOJ GARG
a) If both both firms operate independently by each other then find the number of units of honey and
apple produced ?
b) If both the firm merge , find the profits maximizing output of honey and apples?
c) What is the social efficient output of honey ? if firms are independent how much would honey firm
subsidize to induce efficient supply?
Ques 12 : A c l o t h i n g s t o r e a n d a je w e l r y sto r e a r e l o c a t e d
s i d e b y s i d e i n a s m a l l s h o p p i n g m a l l. T h e n u m b e r o f
c u s t o m e r s w h o c o m e t o th e s h o p p i n g m a l l i n t e n d i n g
t o s h o p at eit h e r st o r e d e p e n d s o n th e a m o u n t o f
m o n e y t h a t th e st o r e s p e n d s o n a d v e r t isi n g p e r d a y.
E a c h st o r e als o at t r a c t s so m e c u s t o m e r s w h o c a m e t o
s h o p a t t h e n e i g h b o r i n g st o r e. If t h e cl o t h i n g st o r e
s p e n d s $ xC p e r d a y o n a d v e r t i s i n g , a n d t h e j e w e l l e r
s p e n d s $ xJ o n a d v e r t i s i n g p e r d a y , t h e n t h e t o t a l p r o f i t s
p e r d a y of t h e cl o t h i n g sto r e a r e ( x C, xJ ) = ( 6 0 + x J ) x C - 2 ,
a n d t h e t o t al p r ofits p e r d a y of t h e jew e l r y st o r e a r e
( x C ,xJ ) = ( 1 0 5 + ) 2 . (I n e a c h c a s e, t h e s e a r e p r o f t s
n e t o f all c o s t s , i n c l u d i n g a d v e r t i s i n g . )
a ) If eac h st o r e belie v e s t h a t t h e o t h e r st o r e's
a m o u n t of ad v e r t isi n g is i n d e p e n d e n t of its o w n
a d v e r t isi n g e x p e n d i t u r e, t h e n w e c a n fi n d t h e
e q u ili b r i u m a m o u n t of ad v e r t isi n g f o r e ac h st o r e
b y s ol v i n g tw o e q u a t i o n s i n t w o u n k n o w n s. O n e o f
t h e s e e q u a t io n s sa y s t h a t t h e d e r i v a t i v e of t h e
cl o t h i n g st o r e's p r o fi ts w it h r es p e c t to its o w n
a d v e r t isi n g is ze r o. T h e o t h e r e q u a t i o n r e q u i r e s
t h a t t h e d e r i v a t i v e of t h e je w e ll e r's p r o fi ts w i t h
r e s p e c t t o its o w n a d v e r tisi n g is ze r o . fi n d t h e
p r o f i t s.
b ) H o w m u c h ex t r a p r o fit w o u l d t h e je w elle r g e t
f r o m a n e x t r a r u p e e a d v e r tisi n g b y th e cl o t h i n g
s t o r e ? H o w m u c h e x t r a p r o f it w o u l d t h e je w e ll e r ’s
a d v e r t isi n g gi v e t h e cl o t h i n g st o r e
c ) If o w n e r s of cl o t h i n g st o r e k n o w s t h e p r o f its
f u n c ti o n of b o t h t h e st o r e s , h e d e ci d e s h o w m u c h
PMG Classes
Whatsapp ONLY - 9899312641
PMG Classes
An Initiative of P. MANOJ GARG
a d v e r t isi n g h e m u s t d o b e f o r e t h e o t h e r o w n e r
d e c i d e s a n d w h e n t h e o t h e r c o m e t o k n o w t h e n
t h e y b o t h w o u l d b e h a v e a c c o r d i n g l y , Fi n d t h e
r e a c ti o n c u r v e of je w e ll e r y st o r e , t h e val u e of
a n d w h i c h m a x i m i z e s th e p r o fits a n d fi n d t h e
p r o f its?
Numericals on Public Goods
Ques 1 : Under what conditions is a unique level of public good supplied at different allocations of private
good ? Explian .
Ques 2 : Why does free access to a common resource usually lead to overuse of the resource? Explain .
Ques 3 : How will quasilinear preference affect pareto efficient allocations of a public good? Discuss.
Ques 4 : Would you say “knowledge” is a public good ?
Ques 5 : What is the Groves –Clarke mechanism for making public good decision?
Ques 6 : Differentiate between non – exclusion and non – rivalry in consumption of public goods using a suitable
example.
Ques 7: Why is the market provision of public goods unlikely to result in a pareto efficient provision of these goods?
PMG Classes
Whatsapp ONLY - 9899312641
PMG Classes
An Initiative of P. MANOJ GARG
Ques 8 : Explain the Coase Theoram relating to the pollution rights equilibrium.
Ques 9: In the market for a public good ,the marginal cost of production is given MC=7 and the preferences of two
consumers are represented by =X+G and =X+ where G represents the consumption of public good and X
represents the private consumption (numeraire good) of consumers.
i. Calculate the pareto optimal amount of the public good if the money endowments of A and B are rupees 10
and 12 respectively .
ii. Will the optimal amount of public good change when the money endowments are increased to 14 and 16
respectively ? why?
Ques 10 : For two room –mates , an air conditioner for their room is a public good . Their utility
functions are given by
= (3+A)
= (5+A)
Where and are their private expenditure and A is 1 or 0 according as the AC is bought or not . if
both room mates have a wealth of Rs. 5000 each and the AC costs Rs. 3000
i. Find their reservation prices for the AC .
ii. Find whether or not it is a pareto improvement for them to acquire the AC.
Ques 11 : Explain , using an example , what do you understand by the free rider problem .also explain the solutions
of free rider problem .
Ques 12: Consider two consumers both having the a money income of Rs. 100 and with utility functions.
=10ln G+
=20ln G+
Where G is their total expenditure on the public good and , are their expenditures respectively on their
private good . Find the pareto optimal amount of the public good. How would this change if their income increased
to Rs.150 each?
Ques : 13 In an economy is one private good and one public good . All the citizens have the same utility
function U( )= - .
The prices of and are Re. 1 and Rs. 10 respectively. Everyone gets an income of Rs. 1000 per year .
a) Find the marginal rate of substitution between and .
b) What is the marginal cost of one more unit of ?
PMG Classes
Whatsapp ONLY - 9899312641
PMG Classes
An Initiative of P. MANOJ GARG
c) There are 1000 people in the economy . write an equation stating that the sum of MRS equals MC .
d) A citizen’s budget constraint is + =1000 and MRS of all citizen’s equal the marginal cost . solve the
combination of and . How much of is consumed in such a case ?
e) If the supply of equals demand for then will the units be equal /larger/smaller than pareto efficient
units ?
f) If the government promotes a subsidy option. If 50% of the cost of providing is paid by the Government
and is compensated by raising taxes . for how many units of will the citizens rate ?
g) Does this subsidy bring about economic efficiency?
Ques 14: T e n p e o p l e h a v e d i n n e r t o g e t h e r a t a n e x p e n s i v e
r e s t a u r a n t an d a g r e e t h a t t h e t o t al bill w ill b e di v i d e d
e q u a ll y a m o n g t h e m.
a ) W h a t is t h e a d d i ti o n a l co s t t o a n y o n e of t h e m
o f o r d e r i n g a n a p p e t i z e r
t h a t co s t s R s. 2 0 ?
b ) Is it a n efficie n t s ys t e m ?
Q u e s 1 5 : I n t h e P M G cit y , 1 0 0 0 citiz e n s c e le b r a t e t h e
P M G ’ s bi r t h d a y e v e r y y e a r . T h e y c a r e a b o u t t w o
t h i n g s f o o d a n d e n t e r t ain m e n t. E n t e r t ai n m e n t c o s t R e.
1 p e r u n i t . All citiz e n s h a v e t h e sa m e u t ilit y f u n c tio n
√
= +
a) Find the absolute value of marginal rate of substitution between food and entertainment.
b) What is the pareto optimal amount of entertainment for the economy.
PMG Classes
Whatsapp ONLY - 9899312641
