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1.2 Out of a population of 170 million, there are 30 million type 1 individuals, and 100 million

type 3 individuals. You learn that, when the prices of the two vehicles are

?

⃗ = (??1, ??2) = (7,15), ??1(?

⃗ ) = 130 million, ??2(?

⃗ ) = 25 million.

1.2.1 How many individuals are type 4?

1.2.2 How many individuals are type 2?

1.3 Using your answer in 1.2, and holding fixed ??2 = 15, draw ??1(?

⃗ ) as a function of ??1

.

Remember, it is best to draw price on the Y-axis, and quantity on the X-axis.

1.4 What would be the effect on quantities and consumer surplus of an increase in the price

(e.g. due to a tax) of polluting fast vehicles from ?

⃗ = (??1, ??2) = (7,15) to (7,25)?

1.5 What would be the effect on quantities and consumer surplus of a reduction in the price

(e.g. due to a subsidy) of “green” slow vehicles from ?

⃗ = (??1, ??2) = (7,15) to (4,15)?

1.6 What would be your considerations if you were to choose between a policy (tax) inducing

the price change in 1.4 and a policy (subsidy) inducing the price change in 1.5?

Please discuss with fewer than 50 words.

1.7 The marginal costs of the two vehicles are ???1 = 6 and ???2 = 5.

1.7.1 If the prices are ?

⃗ = (??1, ??2) = (7,15), is this market perfectly competitive? Why?

1.7.2 If the prices are ?

⃗ = (??1, ??2) = (7,15), is there any allocative inefficiency? Why?

1.8 Knowing that the marginal costs are ???1 = 6 and ???2 = 5, how many individuals would

own a vehicle if prices were perfectly competitive? (Recall: your answers in 1.2 tell you

the number of individuals for each type.)

1.9 Knowing that the marginal costs are ???1 = 6 and ???2 = 5, would your considerations

in 1.6 be different? Please discuss with fewer than 100 words