EC 301 Final Exam (ps6)

Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is M Cp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to M Ce = Q. What is the socially optimal level of output? (a) 20 (b) 25 (c) 30 (d) 45

30

Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park.This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if (a) Al is fined by the government. (b) Al has the right to leave trash and Bert cannot do anything about it. (c) Al has the right to leave trash and Bert can pay him to limit his dumping. (d) Bert moves.

Al has the right to leave trash and Bert can pay him to limit his dumping

In the graph below, the household earns current income I0 and future income I1.Suppose point A is the household's optimal bundle when faced with the solid budget line, then (a) At bundle A, the household is a supplier of capital. (b) The dashed budget line corresponds to a higher interest rate than the solid budget line. (c) In order to consume bundle (I0, I1) the household would need access to the capital market. (d) The household prefers the bundle (I0, I1) to bundle A.

At bundle A, the household is a supplier of capital

The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called (a) Canadian Bargaining. (b) Coase Theorem. (c) Bargaining Theorem. (d) Nash Equilibrium

Coase Theorem

The graph below represents a market with externalities, where SMB stands for social marginal benefit and PMB stands for private marginal benefit. Which one(s) of the following is true? (a) This is a market with positive production externalities. (b) Q1 is the socially optimal quantity. (c) T1 is the deadweight loss created by externalities. (d) The government can improve the total welfare of the society by charging a tax on the consumption in this market.

T1 is the deadweight loss created by externalities

The U.S. Federal government limits the ability for private firms to harvest timber on much government land. This, it is argued, increases the amount of fuel for wildfires which often burn out of control and cost money and manpower to control (a) This suggests that the policy addressing one positive externality might have created another positive externality. (b) This suggests that those who harvest timber are prone to starting wildfires. (c) This suggests that the policy addressing timber harvesting created a negative externality. (d) This suggests that government policy is destined to fail.

This suggests that the policy addressing timber harvesting created a negative externality

The graph below depicts a worker's tradeoff between leisure and income. Which one of the following statements is true? (a) At bundle A = (30, 30), the worker supplies 30 hours of labor. (b) On the solid budget line, the worker's hourly wage is $1/hour. (c) When moving from the dashed budget line to the solid budget line, the substitution effect should increase the worker's labor supply (d) When moving from the dashed budget line to the solid budget line, the income effect should increase the worker's labor supply.

When moving from the dashed budget line to the solid budget line, the income effect should increase the worker's labor supply

Which of the following is NOT a club good? (a) cable television (b) a rock concert (c) a country club (d) a club soda

a club soda

Which of the following policies addresses the problem posed by positive externalities? (a) a subsidy to the agent that generates the positive externality (b) a tax on the agent that generates the positive externality (c) limit the activity that generates the positive externality (d) a subsidy to the agents that benefit from the positive externality

a subsidy to the agent that generates the positive externality

If a production process creates positive externalities, a competitive market produces too few positive externalities because the producer (a) does not pay all the costs of the externalities. (b) does not receive compensation for the externalities. (c) Both A and B. (d) None of the above

does not receive compensation for the externalities

The figure below shows the market for steel ingots. If the market is competitive, then to achieve the socially optimal level of pollution, the government can (a) outlaw the production of steel. (b) institute a specific tax of $25. (c) institute a specific tax of $50. (d) institute a specific tax equal to area b

institute a specific tax of $50

Suppose twenty neighbors share a park. One of the neighbors, Al, leaves trash in the park. This bothers the other neighbors. According to Coase's Theorem, assigning the property rights to the park to Al (a) will achieve the socially optimal quantity of trash. (b) will result in zero trash being dumped in the park. (c) might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly. (d) is unfair

might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly

The Commons Problem arises because (a) firms don't maximize profits. (b) social and private incentives are not aligned and property rights are missing. (c) social cost equals private cost and property rights are missing. (d) social benefit equals private benefit and property rights are missing

social and private incentives are not aligned and property rights are missing

If a production process creates pollution, a competitive market produces excessive pollution because (a) private marginal cost of pollution exceeds its social marginal cost.(b) social marginal cost of pollution exceeds its private marginal cost.(c) the marginal benefit of pollution to the firm is zero. (d) zero pollution is optimal

social marginal cost of pollution exceeds its private marginal cost