EEP1/Econ 3
Final Fall 2008
Clearly mark 2 blue books as Blue Book A and Blue Book B and answer Q1, Q2 & Q3 in Blue Book A and Q4, Q5 &Q6 in Blue Book B. Don’t forget to write your name on all blue books! Good Luck!
Answer the following questions (Q1, Q2 and Q3) in Blue Book A
Question 1 (Answer in Blue Book A)
True, False, or Uncertain and explain (1 point each; 7 points total)
a) Monopoly causes a deadweight loss and this is all that is wrong with monopoly.
b) According to the Coase Theorem, how we distribute tradable permits initially will not matter for the final cost of pollution and pollution levels of each firm.
c) All technologies that produce a given quantity of a good are on an isoquant curve.
d) When income goes up, the market equilibrium quantity of every normal good must increase.
e) The marginal cost curve intersects the average fixed cost curve at its minimum
f) If the price of an exhaustible resource goes up faster than the rate of interest, then nobody would want to own the resource.
g) The area under the marginal cost curve is average cost.
Question 2 (Answer in Blue Book A) (6 points)
Consider two policies to control emissions. The first policy is a technology based effluent standard. The second policy is a tax on effluent. Both policies lead firms to choose the same amount of effluent per unit output.
a) Draw and isoquant-isocost curve diagram that shows this situation and use it to explain why one policy has higher costs than the other. (3 points)
b) Draw a diagram of the industry in the long run and use it to explain why in the long run one policy has more pollution than the other. (3 points)
Question 3 (Answer in Blue Book A) (7 points)
Public goods and externalities.
a) Define and give an example of a public good. (1 point)
b) Draw a picture and use it to explain why the market underprovides public goods.
c) Define and give an example of an externality. (1 point)
d) Draw a picture and use it to explain why the market overprovides a negative externality (2 points)
e) Is a city park a public good? Does it provide an externality? Justify your answer briefly. (1 point)
Answer the following questions (Q4, Q5 and Q6) in Blue Book B
Question 4 (Answer in Blue Book B) (1 point each; 5 points total)
How would a benefit cost analysis of a dam depend upon:
a) The interest rate
b) Uncertainty about the price of the dams output (e.g. electricity)
c) Whether funds or the dam site were scarce
d) Who benefitted from the dam
e) Alternative projects, like different sized dams.
Question 5 (Answer in Blue Book B) (8 points)
Some say that the United States has a free market economy. Pick four examples from our course where the US government interfered in the economy. Which interventions were justified by market failures of various sorts? Which were not? Explain.
Question 6 (Answer in Blue Book B) (7 points)
The United States requires that ethanol be added to gasoline. Ethanol is made from corn. Assume ethanol would not be used for this purpose without the requirement.
a) What does this policy do to the marginal cost in the motor fuel market? (1 point)
b) Using a supply and demand framework, use figures to show what this policy does to the equilibrium price and quantity of corn and motor fuel. Explain. (4 points)
c) Show the deadweight loss of this program in both corn and motor fuel markets. (2 points)