EEP1/Econ3
Midterm 2 2015
1. (5pts) Give a definition:
a. Option Value
b. Cost function
c. Stated Preference
d. Grandfathering
e. Hedonic method
2. (7pts)Draw a diagram using isocost lines and isoquants and use it to explain why a tax on
a polluting input is more expensive to a firm than a requirement to use less of the input.
Assume that requirement and the tax both lead to the same technique and the same
output. Follow these steps:
a. (1pt) Draw a diagram with an isoquant curve, an isocost line and a chosen input
bundle (technique).
b. (1pt) Why is the technique you marked chosen?
c. (1pt) Assume the input on the horizontal axis causes pollution and the government
restricts its use. Use your diagram to show what happens, output held constant.
Label your result.
d. (2pts) Now show how a tax can lead to the same result. Explain.
e. (2pts) Use your diagram to show which method costs the firm more. Explain
3. (4pts) Consider a price taking firm and explain:
a. What is the supply curve for a single competitive firm? Explain why this is true.
b. Draw a diagram that shows long run competitive equilibrium, with four firms
producing at the equilibrium point. Include in your diagram the firm's AC, AVC,
and MC, the industry short run supply curve, the industry demand curve, and the
industry long run supply curve. Explain each element in your diagram and
explain how your diagram shows long run compeititive equilibrium..
4. (4pts)This problem is about finding a recreation demand curve for an imaginary park,
Jellybear. See the other side of this exam the relevant information.
a. Find the total number of visitors when the entrance fee is $2. Explain ALL the
steps.
b. Instead assume that you were a researcher and you did not know the relation
between visits per capita and costs. How would you find that relationship using a
revealed preference method? (Your answer does not need to include the details of
methods to fit lines to data points.)
2. The following table gives information on visitors to Jellybear Park:
City of Origin Population
Distance
Alabaster
1000
1
Beautiful
3000
3
Cornucopia
5000
5
Delight
7000
7
The travel cost per mile (one way) is $1.
Visits/Capita= 1 – 0.15*(One-Way Cost + admission fee).