a) Let us say that there is a product called A. Units of this product may be of high quality (H) or low quality (L). The minimum price that sellers are willing to accept for supplying a high-quality unit or a low-quality unit (subscripts H and L indicate “high-quality and “low-quality”) is described by the equation: QH = PH – 100 and QL = 2PL - 50. The maximum price that buyers are willing to pay for a high-quality unit or a low-quality unit is described by: PH = $400 and PL = $100. Find the equilibrium prices and quantities under perfect information. Please make sure you show the steps in arriving at the answers.

b) Suppose that the competitive market as specified above (in Question a, with the same cost curve for each firm and the same market demand curve) emits pollution into the air from the production of the good, with the following external marginal cost: EMC = $2 per unit of output. It is assumed that each unit of output generates 1 unit of pollution. To get the industry to internalize this external cost, a Pigouvian tax of $2 per unit of output is instituted. It is still assumed that the market behaves competitively. Draw a graph to show the competitive equilibrium before and after the tax. Make sure that you label the curves and the axes, and show the equilibrium values on the axes.

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a To find the equilibrium prices and quantities under perfect information we need to find where the quantity supplied equals the quantity demanded for ... View the full answer