Problem 14 An unregulated industry produces zappas and sells them in a competitive market. The inverse supply function for the firm in this market is: P = 6 + 2Q

Problem 14

An unregulated industry produces zappas and sells them in a competitive market. The inverse supply function for the firm in this market is:

P = 6 + 2Q

where P is the price per unit of zappa produced (dollars/zappa) and Q is the number of zappas produced per year. The elasticity of supply (Es) is 2.125. The elasticity of demand (Ed) is -4.25. The equilibrium price in the unregulated market is 34/3 dollars/zappa.

a. What is the function describing the demand in the unregulated market?

b. What is the consumer and producer surplus in the unregulated market?

Now suppose the production of zappas produces emissions that cause people to freak out. To address the emissions problem, suppose the government sets a regulation that increases the cost of production of zappas by 2 dollars/zappa.

c. What is the new equilibrium price and quantity? What assumption(s) did you make when determining these values?

d. Ignoring the benefits associated with the emission reduction, what is the change in consumer, producer, and social surplus?

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