Assignment
1. Suppose that The Salt River Project (SRP) has a acquired a large amount of land on the outskirts of the Phoenix Metropolitan Area and is deciding between i) constructing a large-scale solar farm or ii) creating a nature preserve. The solar farm would generate 500 megawatts of electricity but would take 2 years to construct and generate considerable traffic, noise, and air pollution for nearby residents during that time. The nature preserve would plant a variety of native vegetation to provide provide new habitat for local wildlife. Currently, the land is vacant but lacks any vegetation. If SRP decides to build the solar farm (instead of the preserve) what is included in the opportunity cost? Explain
2. Supply and demand analysis.
a) Suppose the market for Nissan's electric cars is currently in equilibrium. Suddenly, Tesla announces that they will drop the price of all their electric cars by 20%. What happens to the price and quantity of Nissan's electric cars in the new equilibrium? Draw a graph with the initial equilibrium price and quantity and the new equilibrium price and quantity. Explain your answers.
b) Suppose the market for Apple Watches is currently in equilibrium. Then, workers at Apple's factories go on strike and demand a wage increase. This raises the cost of producing each Apple Watch. What happens to price and quantity for Apple Watches in the new equilibrium? Draw a graph with the initial equilibrium price and quantity and the new equilibrium price and quantity. Explain your answers.
c) Suppose ASU increases the price of admission to ASU Basketball games. How does this affect the demand for basketball tickets? What about the quantity demanded? (Hint: you do not need to draw a graph for this one).
d) The market for air conditioning in Phoenix is initially in equilibrium. Then, average temperatures perma- nently increase by 10 degrees. What happens to the price and quantity of air conditioners in the new equilibrium? Draw a graph with the initial equilibrium price and quantity and the new equilibrium price and quantity. Explain your answers.
3. The demand for guided rafting trips through the Grand Canyon is given by p = 42 - 5qd. The supply curve for rafting trips is p = 7 + 2qs.
a) What is the market equilibrium price and quantity of rafting trips on the Grand Canyon?
b) Graph the equilibrium. Label the intercepts and the equilibrium price and quantity.
c) Label the areas on your graph from part b). Indicate which area corresponds to consumer surplus. Indicate which area corresponds to producer surplus.
d) Calculate consumer surplus.
e) Calculate producer surplus.
4. It turns out that there is a negative externality associated with rafting trips on the Grand Canyon because each additional trip congests the river and reduces other users' enjoyment. The marginal damage of trips down the Grand Canyon is given by p = 3q.
a) Redraw the equilibrium from question 3b, adding the marginal damage function and the social marginal cost
curve.
b) Indicate on the graph the efficient number of trips down the Grand Canyon.
c) Calculate the efficient number of trips.
d) Label the areas on your new graph either by shading or using letters as demonstrated in class. What areas correspond to consumer surplus, producer surplus, external damage, and the deadweight loss due to the externality at the initial equilibrium?
e) What areas correspond to consumer surplus and producer surplus at the efficient number of trips?
5. Describe, in your own words, the difference between a public good and an open-access resource. Give an example of each.