Question

Add-ons Help All changes saved in Drive - Arial - 11 - BIUA, IEE 12314 Valuing Costs and Benefits Exercise: Estimating the impacts of a policy on producers Suppose the government has introduced a resource policy for a preservation of a natural resourcelenvironment. As a result, it has changed the production cost of the producers who use the natural resource and environment. More specifically, it has increased the marginal costs (MC) by a constant amount of $10. Suppose the following information has given for estimating the impacts of the policy: MC=5+104 Demand function: 40 (constant regardless of the quantity of production) Find the impacts (change in the producer's surplus) of the policy = cooool

Answer 1

Setting Demand = Initial MC,

5 + 10q = 40

10q = 35

q = 3.5

When q = 0, MC = 5 (vertical intercept of MC function)

Producer surplus (PS) = Area between MC curve and price = (1/2) x (40 - 5) x 3.5 = 1.75 x 35 = 61.25

After the policy, MC increases by 10 and new MC is:

MC = 5 + 10q + 10 = 15 + 10q

Setting Demand = New MC,

15 + 10q = 40

10q = 25

q = 2.5

From new MC function, When q = 0, MC = 15 (vertical intercept of new MC function)

New PS = Area between new MC curve and price = (1/2) x (40 - 15) x 2.5 = 1.25 x 25 = 31.25

Decrease in PS = 61.25 - 31.25 = 30