When the price of one pen is 1, 50 notebooks are demanded. When ...

[jlmhmf]

When the price of one pen is 1, 50 notebooks are demanded. When the price per pen increases to 5, the number of notebooks demanded decreases to 30. What is the cross-price elasticity of demand between the two goods using the arc method?
 
  A) 0.1
  B) -0.375
  C) 3
  D) -3

Question 2

When does a private solution to a negative externality fail to allocate resources efficiently?
 
  What will be an ideal response?

[TheDev123]

Answer to Question 1

B

Answer to Question 2

Private bargaining between the party generating a negative externality and the party suffering from it leads to an efficient allocation of resources. However, such a private solution fails to allocate resources efficiently when the transaction costs associated with bargaining are too high and the number of affected people is large.