ESP 162: Midterm question examples

TRUE OR FALSE

Circle (T)rue or (F)alse for EACH statement below.

T F 1. Choosing the project with the highest cost/benefit ratio ensures that net benefits are maximized.

T F 2. Discounting in benefit-cost analysis is not intended to address inflation, that is, the general rise in prices of goods over time.

MULTIPLE CHOICE

Circle all that apply.

3. In Garrett Hardin’s central example of the “Tragedy of the Commons” the grassland is an open access resource upon which herdsmen may graze their cattle. If ownership of Hardin’s commons was given to a single individual who maximized his/her own payoffs, the impact on the grassland of grazing would be

A.  external

B.  at a socially efficient level

C.  internalized

D.  ignored

4. An open access resource is

A.  Open to uncontrolled access by users

B.  Nonrival and nonexcludable

C.  Rival and nonexcludable

D.  Nonrival and excludable

E.  Rival and excludable

SHORT ANSWER

Answer in the space provided. Make sure to show your work for calculations.

Question 5.

A hog farm produces both pork and and pollution in the form of effluent. The table below specifies points on the marginal cost (MC) and marginal WTP (MWTP) curves for pork production:

Output / 1 / 2 / 3 / 4 / 5 / 6 / 7
MWTP / 15 / 12 / 9 / 6 / 3 / 2 / 0
MC / 1 / 3 / 5 / 6 / 9 / 11 / 13

Effluent from the operation pollutes a nearby watershed which causes damage to other users of the watershed for which they are not compensated. This marginal external cost is equal to a constant level of 4 for each unit of pork produced. There is no policy in place to address this externality.

At the predicted market equilibrium:

What is (1) the quantity of pork supplied?

(2) the price?

(3) the value of TOTAL damage to watershed users?

At the socially efficient outcome:

What is (1) the quantity supplied?

(2) the value of TOTAL damage to downstream users?

Give an economic explanation for why the socially efficient level of damage to downstream users in this case either is or is not equal to zero. (3 sentences or less)

Question 6.

NOTE: While you should have the tools to figure out this question, the particular model is one that has been shifted to after the mid-term and will be discussed in detail later in the quarter.

A factory emits pollution which causes damage to all residents of a nearby city. On the graph below, e0 represents the level of emissions from the factory when there is no abatement. The marginal abatement cost is increasing in the level of abatement. The marginal damage is increasing for each additional unit of emissions.

On the graph above:

a. Draw MAC and MD functions consistent with the details above (assume that they are straight lines). Label your functions “MAC0” and “MD0”.

b. Label the socially efficient level of emissions on the horizontal axis “eSE,0”

One year later, the population of the city has increased significantly but nothing else has changed.

c. Depict in your graph the effect of this population increase (using new functions (lines) as needed). Make sure to label any new lines with a subscript, e.g. “MAC1” and/or “MD1”.

EXPLAIN your economic reasoning for any new lines HERE, including why any functions shifted in the way you drew them (2 sentences or less):

d. Mark the new socially efficient level of emissions with “eSE,1”

e. Has the new level of socially efficient emissions increased or decreased? Using economic reasoning, explain why. (3 sentences or less)

Question 7.

Name and define the two key features of a public good.

(1)______Definition (1 sentence only):

(2)______Definition(1 sentence only):

Question 8.

Everyone living in Isolation, Alaska works at one of two fish canneries for their entire life. Over a career at Placid Cannery a worker is paid $1 million and the risk of death by canning machine is 1%. At Megadeath Cannery a worker is paid $1.25 million and the risk of death is 5%. What is the value of a statistical life in Isolation? [For credit you must show your math.]