3)

An innovative new herbicide, with the main ingredient Dicamba, has attracted a remarkable amount of attention. The herbicide is quite effective for certain crops, but its drift effect may be harmful to neighboring farmer's crops.

An October 27, 2020,Wall Street Journalarticle titled "Bayer, BASF Weedkillers Cleared by EPA for Another Five Years" documented how the U.S. Environmental Protection Agency (EPA) recently ruled that farmers can only use dicamba products after a certain date in the crop cycle. Use of dicamba products earlier in the crop cycle can result in damage to neighboring fields that grow crops that are not intended to be treated by Dicamba.

This can be a significantnegative externality. Indeed, the Marginal Social Cost for the industry would be the sum of the marginal private cost (the firms' MC curves)plusthe social cost of Dicamba drift on neighboring fields.

Now, consider the market for crops that are intended to be treated with Dicamba.

(Again, you do not need to read the article in order to answer this question.)

Construct a graph which shows the original demand and supply for the market for agricultural crops that benefit from Dicamba treatment (labeled correctly asD₀andS₀) and equilibrium price (P₀) and quantity (Q₀) on fields without the use of dicamba products. Please make sure that you appropriately label your axes.

Next, consider what happens when farmers use dicamba products too early in the crop cycle to attempt to increase the crop yield. You should add another curve that reflects the Marginal Social Cost given the existence of the negative externality, and label it appropriately.

In a short narrative, explain what, if anything, happens to price and quantity established in the marketplace, given the presence of this negative externality?

What is the outputQ_SO3the Benevolent Dictator would choose (where SO3 stands for Socially Optimal output here in question 3)? Is this output level different from the market outcome, and if so, how and why?

Indicate graphically and explain in a narrative the area of deadweight loss (DWL), if any, given the existence of this negative externality. What does deadweight loss mean in this context?

5)

Questions 5, 6, and 7 consider the maritime shipping market (large container ships and oil tankers). The October 20, 2020 issue ofThe Economistfeatured an article titled "How Covid-19 Put Wind in Shipping Companies' Sails." (You do not have to read this article to understand the setup of questions 5, 6, and 7.) The article reports that the onset of the pandemic has caused a large boost to demand for maritime shipping, pushing maritime shipping prices to reach a ten-year high.

Assume, for purposes of Questions 5, 6, and 7, that this market is currently a perfectly competitive market with the following conditions: 1) Downward sloping market demand; 2) Upward sloping market supply; and 3) U-shaped Average Total Costs and Marginal Costs for individual firms.

Question 5:

You should assume the shipping industry is initially in Long Run Equilibrium prior to the arrival of Covid-19.

Graphically depict (using side-by-side graphs, with the graph on the left showing the market and the graph on the right showing an individual supplier/producer representative of the rest of the firms):

the perfectly competitive supply and demand curves (S₀andD₀, respectively) and the market price and quantity (P₀andQ₀respectively)

an individual firm's marginal revenue (MR), marginal cost (MC), average total cost (ATC) curves, the profit maximizing quantity (P₀andq₀), and profit (₀) before the arrival of Covid-19. If there is no profit, please indicate so on the graph.

Provide a brief narrative explaining the profitability of an individual firm in an LRE.

Please make sure to label all relevant points and axes.

6)

Now consider the impact of the arrival of Covid-19 and the pandemic. As indicated above, the arrival of the pandemic greatly increased market demand for shipping.

On the same (side-by-side) graph you produced in Question 5, graphically depict any changes in the marketplace and any changes that impact the individual firm.

Show the movements of the appropriate curve or curves at this new Short Run Equilibrium (SRE).

Indicate the new market equilibriumP₁andQ₁, the optimal output of an individual firm representative of the other firms in the industry at this SRE (labeled asq₁), and the individual firm's profit, if any (shaded and clearly labeled as₁).

Provide a brief narrative explaining the movements and the resulting change in an individual firm's profit, if any. Please make sure you address the changes in the market equilibrium quantityQ, market priceP, and the individual firm's profit maximizing quantityq, if any.

Please make sure to label all relevant points and axes.

7)

Continuing your analysis of the Short Run Equilibrium (SRE) in the shipping industry established with the arrival of Covid-19, and assuming that the increase in demand for shipping services is permanent:

Using the same side-by-side graph you've used in Questions 5 and 6, please show the movements of all applicable curves (both in the market and for an individual firm) using a subscript of 2 for such curve labels.

Indicate the new LRE equilibrium asP₂andQ₂, the optimal output of an individual firm representative of the other firms in the industry at this LRE (labeled asq₂), and the individual firm's profit, if any (shaded and clearly labeled as₂). If there's no profit, indicate that₂is equal to zero on the graph.

In a brief narrative, describe what will happen to this industry as it moves from the Short-Run Equilibrium (SRE) to the eventual Long Run Equilibrium (LRE).

Please make sure to label all relevant points and axes