3. Two drivers - Tom and Jerry - each drive up to a gas station. Before looking at the

price, each places an order. Tom says, "I'd like 10 gallons of gas." Jerry says, "I'd like

$10 of gas." What is each driver's price elasticity of demand?

4. Several years ago, flooding along the Missouri and the Mississippi rivers destroyed

thousands of acres of wheat.

(1) Farmers whose crops were destroyed by the floods were much worse off, but

farmers whose crops were not destroyed benefited from the floods. Why?

(2) What information would you need about the market for wheat to assess whether

farmers as a group were hurt or helped by the floods?

5. The market for gasoline is characterized by the following demand and supply curves:

QD =1602P QS =40+2P where QD is the quantity demanded, QS is the quantity

supplied, and P is the price per barrel. Currently there is no attempt to regulate the

emissions of sulfur emissions into the air by gasoline refineries when making the

gasoline. As a result, none of the refineries do anything to reduce their sulfur emissions.

The marginal external cost (MEC) associated with the refining gasoline at these plants

is given by the curve MEC = 0.6QS.

(1) Calculate the output and price of gasoline if it is produced under competitive

conditions and no attempt is made to monitor or regulate the sulfur emissions.

(2) Determine the socially efficient price and output of gasoline.

(3) Calculate the deadweight loss from a market that has competitive conditions

but no regulation of sulfur emissions.

(4) What specific tax (per unit of output or pollution) results in the social

optimum?

6. Assume that the demand curve for an environmental good is fully coincidental with

the marginal social benefit function and can be described as MSB = MPB = 24-2q,

where q refers to the quantity of the good. Assume that the marginal private cost

function can be described by MPC = q, and that marginal social costs are always double

the marginal private cost.

(1) Determine an equation for the marginal social costs (MSC).

(2) Graph the functions and algebraically determine

a) the market level of output

b) the optimal level of output

(3) Calculate social welfare at the market level of output and at the optimal level of

output. What is the deadweight loss from these social costs?