Consider a market where demand is P=10-2Q. There is a negative production externality of $2.50/per unit of consumption. Supply is equal to p=q/2

1. What is the market equilbrium

2. what is the social optimum quantity and price

3. If the government uses a tax to get producers to internalize the externality what is the net price recieved by producers

4. Calculate the total surplus at the market equilibrium

5. Calculate the total surplus at the social optimum and with the tax

A large share of the world supplly of diamonds comes from Africa and Europe. Suppose the marginal cost of mining diamonds is constant at $1000.00 per diamond, and the demand for a diamond is described below:

Price Quantity

8,000 5,000

7,000 6,000

6,000 7,000

5,000 8,000

4,000 9,000

3,000 10,000

2,000 11,000

1,000 12,000

1. If Europe and Africa formed a collusive oligolopy what would be the price and quantity

2. If the countries split the market evenly, whould be Europes production and profit

3. What would happen to Europes profit if it increased its productivity by 1,000 while Africa stuck to the collusive oligopoly agreement?

4. Use the answer from number 3 to explain why cartel or collusive oligopoly agreements are often not successful