Question

Practice Problems 1. The marginal benefit of eating quinoa is given by $30 -0.3*Q and the marginal cost of producing quinoa for sale in stores in the US is $20 + 3* Q, where Q is in tons a. What are the equilibrium price and quantity? b. Suppose quinoa, which is grown in mountainous areas, requires a lot of irrigation water that is currently free. The government starts to charge a price for water that equals $2.00 per ton of quinoa produced. How does this change the equilibrium? c. Quinoa, which for decades or more had been considered a specialty grain, is now found to have important health benefits that are valued at $6.00 for each ton of quinoa consumed by buyers. What now is the social welfare maximizing output level? d. Assume lb and 1 c happen at the same time. 2. Roundup is a brand of glyphosate-based herbicide made by the Monsanto Company, which is owned by Bayer, Inc., that is widely used in the US to control weeds. In May 2019, a California jury awarded $2 billion to a couple who claimed their cancer (non- Hodgkins lymphoma) was caused by Roundup exposure. This news was widely publicized to the public. Suppose the public reacts to this news by demanding less Roundup at all prices. The federal government also imposes a tax on Roundup to finance cancer research. Model

Answer 1

(Question 1)

(a)

Setting MB = MC,

30 - 0.3Q = 20 + 3Q

3.3Q = 10

Q = 3

P = 20 + 3 x 3 = 20 + 9 = 29

(b)

The water charge is equivalent to a tax that shifts supply curve leftward by $2 and new supply (MC) function is

MC = 20 + 3Q + 2 = 22 + 3Q

Setting MB = New MC,

30 - 0.3Q = 22 + 3Q

3.3Q = 8

Q = 2.42

P = 22 + 3 x 2.42 = 22 + 7.26 = 29.26 (price paid by buyers)

[Price received by sellers = 29.26 - 2 = 27.26]

(c)

The health benefit will increase MB, shifting MB curve rightward by $6 and new MB function is

MB = 30 - 0.3Q + 6 = 28 - 0.3Q

Setting new MB = Initial MC,

28 - 0.3Q = 20 + 3Q

3.3Q = 8

Q = 2.42

P = 20 + 3 x 2.42 = 22 + 7.26 = 29.26

(d)

Setting New MB = New MC,

28 - 0.3Q = 22 + 3Q

3.3Q = 6

Q = 1.82

P = 22 + 3 x 1.82 = 22 + 5.46 = 27.46

NOTE: As HOMEWORKLIB Answering Policy, 1st question has been answered.