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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
