1. (14 pts) Consider the market for honey, which is in perfect competition. It costs a constant $5 to make each additional jar of honey^[1]. The demand for honey is given by

D: P = 30 - 0.05Q

Each jar of honey generates $5 in positive externalities because honey bees pollinate nearby plants and crops, which we will model as increasing the social marginal benefit. For now, we will consider only what happens in the private market equilibrium (not the socially efficient point).

1. (2 pts) What are the private market equilibrium price and quantity?

1. (2 pts) In this equilibrium, how much externality is created?

1. (2 pts) In this equilibrium, what is the sum of consumer surplus (CS) and producer surplus (PS)?

1. (2 pts) In this equilibrium, how much total surplus (TS) is created?

1. (2 pts) Suppose we forcibly required one hundred more consumers to buy at the market price, moving the total market quantity from Q^mkt to Q' = Q^mkt + 100. How much consumer surplus do these additional consumers lose from being forced to participate in this market? (Assume these coerced consumers are the next people who would buy, so their WTP are given by the demand curve from quantity Q^mkt to Q'.)

1. (2 pts) How much additional externality is created in the shift from Q to Q'?

1. (2 pts) What is the overall change in total surplus from the shift from Q to Q'? (There is no change in producer surplus)

1. (10 pts) The market for SUVs is in perfect competition. Every time an SUV is driven, it creates pollution, congestion, and potential hazards to other drivers. Model this as a negative externality on consumption (so apply the externality to the demand curve).

Draw three graphs of this market on the same page, stacked vertically, NOT side-by-side.

1. (3 pts.) In the top graph, draw the normal supply and demand curves, indicate the market equilibrium price and quantity, and indicate the CS and PS regions.

1. (4 pts.) In the middle graph, draw the SMC and SMB curves, indicate the efficient quantity, and shade in the TS that would be realized at the efficient point. Draw a vertical line to indicate where the market quantity is (just taking the location from part a; do NOT represent the private curves on this graph). Indicate the DWL triangle.

1. (3 pts.) In the bottom graph, draw the PMC, PMB, SMC, and SMB curves. (Note: two of these curves are the same line.) Indicate the market quantity and price, the CS, the PS, the X region, and the DWL.

1. (12 pts) Sheena Loughlin has a dean-granted monopoly on the sale of coffee, a product with no close substitutes. Her cost functions are:

TC = 50 + 15q + 0.5q²

MC = 15 + q

The demand is given by D: P = 70 - 0.2Q

1. (3 pts) What is Sheena's marginal revenue (MR) equation?

1. (4 pts) Solve for Sheena's profit-maximizing quantity and price.

1. (2 pts) How much profit does Sheena earn?

1. (2 pts) What would be the efficient quantity?

1. (1 pt) If Sheena produced the efficient quantity, what would her profits be?

^[1] Hint: what does this sentence tell you about the function of the supply curve, or the private marginal cost curve? It may have a different shape than you are used to.