EEP 1 2011
Peter Berck
First Hour Exam.
Name:____________________
Answer all four questions.
1.
Define each of the following in a few words.
a. Normal good
b. Externality
c. Total willingness to pay
d. Substitute goods
e. Willingness to accept
2. Consider a group of students who share a bathroom, and there are no janitorial services
provided. Some of the students prefer a clean bathroom; others have a high tolerance for
messiness.
a) Explain why there is a good chance that the bathroom will end up a mess. (What type of
good is messiness?)
b) Explain how the mess can be Pareto optimal.
c) Explain how the mess might be cleaned up in a pareto improving trade.
3.
On the graph below, label supply and demand. The remaining curve was constructed to show
the effects of a specific tax.
a. How big is the tax?
b. What is the incidence of the tax on the consumer and the producer?
c. What is the change in consumer surplus because of the tax? (you can show it on the graph)
5
4
P
3
2
1
0
0
5
10
15
Q
4. Draw a budget curve and indifference curve diagram and use it to find two points on a demand
curve. Carefully explain all that you have done. Label axes, curves, and relevant points on your
diagram. Draw one more line to find the compensating variation for the price change in your
diagram. Explain.