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YOUR NAME:
G406 (Spring 2012) Final Exam
This is an open-book, closed-Internet test. Please answer every one of the questions. You may use the
back of the page if you need extra space on which to write. The test is 2 hours in length. The multiple choice
questions are each worth 2 points, and each of the other questions is worth 4 points. The grade will be curved.
1. How long is the public comment period
(a) 30 days
(b) 60 days
@(c) 30-90 days
(d) 0-30 days
(e) 120 days
2. The incentives of the agency setting electrical
standards for wiring in new houses will lead it to
@(a) Overly strict requirements
(b) Overly lax requirements
(c) Overly rapid changes in requirements
(d) Impose higher requirements on the party not in
office
(e) Impose lower requirements on foreign firms.
3. If the marginal cost of tires is increasing, and
the marginal cost of the air pollution externality
from making tires is falling, then the optimal
pollution tax
(a) Will equal the private marginal cost of tires.
(b) Will equal the marginal benefit from tires.
(c) Will equal the externality cost at an output of
zero tires
(d) Will equal the marginal externality cost before
the tax is imposed.
@(e) Will equal the marginal externality cost once
the tax is imposed.
4. For most projects, the federal government ‘s
discount rate is
(a) Between 0 and .9 percent.
(b) Between .9 and 2.9 percent.
(c) Between 2.9 and 5.9 percent..
@(d) Between 5.9 and 8.9 percent.
(e) More than 8.9 percent.
5. Market and government forces will tend to move
industries that produce water pollution to
(a) Richer countries.
@(b) Poorer countries.
(c) Safer countries.
(d) Older countries.
(e) Countries more remote from the U.S.
6. An entrepreneur has an idea that will yield 20%
if it works and 2% if it fails,both having equal
probability, for any size of investment. He can
borrow at 5% and starts with 20 million in assets.
His expected profit will be highest if he borrows:
(a) Nothing
(b) .1-2 million dollars.
(c) 2.1-4 million dollars.
(d)4.1-17 million dollars.
@(e) 17.1-19 million dollars.
7. The Li Copula formula
(a) Increases leverage.
(b) Reduces leverage.
@(c) Values complicated assets
(d) Reduces overall risk.
(e) Increases the transparency of financial
transactions.
8. Suppose we buy 10% of our widgets from Apex
and 90% from Brydox. Apex’s widgets fail with
probability .5 and Brydox’s with probability .1. A
widget has just failed. What is the probability it is
from Brydox?
(a) 0 to 5%
(b) 5.1-10%
(c) 10.1-13%
(d)13.1-20%
@(e) Over 20%
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9. Let supply be Q=12+P and demand be P= 32-Q.
The equilibrium price is
(a) Less than1
(b) 1.1-3.
(c)3.1-8.
@(d) 8.1-12.
(e)More than 12
10. In what year was the second major antitrust
law passed?
(a) Before 1890
(b) 1891-1900
(c)1901-1910
@(d) 1911-1920
(e) After 1920
11. If the supply curve shifts down, a monopsony
buyer will
@(a) Increase its quantity purchased
(b) Reduce its quantity purchased
(c) Leave its quantity unchanged
(d) Might either reduce or increase.
(e) Shift the supply curve back out.
13. The average nominal return on the stocks of
small companies 1970-2007 was
(a) 0 to 5%
(b) 5.1-10%
(c) 10.1-13%
@(d)13.1-20%
(e) Over 20%
14. Which of the following most commonly
increase sales rather than reducing them?
(a) Market power
(b) Property right absence
@(c) Externalities
(d) Asymmetric information
@(e) (c ) and (d)
15. Pricing below cost is illegal
(a) Always
(b) As a per se violation
@(c) If it increases market power.
(d) If it is in the context of banking.
(e) If it creates poor information.
16. Smith has noisy parties at his house, which
bothers neighbor Jones. If the assumptions of the
Coase Theorem are met, then the assignment of
who gets to control the noise
(a) Results in less noise.
@(b) Does not affect the amount of noise.
(c) Increases the amount of noise.
(d) Helps Smith and not Jones.
(e) Helps Jones and not Smith.
17. Which state has the highest mortgage default
rate?
(a) Iowa.
@(b) Nevada
(c) Texas.
(d) Florida
(e) California.
18. Which of the following is not part of the utility
rate-setting process?
(a) Document submission by the utility
(b) Public hearings.
(c) Written comment by the public
@(d) Official comment by the governor
(e) All of the above are part of it.
19. A merger is illegal if
(a) The companies are in banking.
(b) One company is about to fail.
(c) The companies are in the same market
(d) The companies are conglomerates
@(e) It would tend to monopolize the market.
20. The biggest of these problems in using the
wages from hazardous jobs to estimate the value of
a human life is
(a) The data is quickly obsolete.
(b) The data covers only Americans.
@(c) People in those jobs value life less.
(d) People in those jobs value life more.
(e) Wage data does not include fringe benefits.
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21. If a company’s marginal cost is 3 and the
demand facing it is Q= 36- 2P, then its output will
be
(a) Less than 4
(b) 4.1-8
(c) 8.1-12
@(d) 12.1-25
(e) More than 25
Note: P= 18-Q/2, MR= 18-Q. 18-Q=3 so Q=15.
22. What is consumer surplus from the last
question?
(a) Between 0 and 14.1.
(b) Between 14.1 and 26.1.
(c) Between 26.1 and 47.1.
@(d) Between 47.1 and 80.1.
(e) Above 80.1
At Q=15, P= 10.5. .5(18-10.5)15= 56.25.
23. If we assume efficient rationing instead of
inefficient rationing, how do surplus under a
minimum wage change?
(a) Employer surplus rises and worker surplus falls.
(b) Employer and worker surplus fall.
(c) Employer and worker surplus rise.
(d) Employer surplus falls and worker surplus
rises.
@(e) None of the above
The form of rationing won't affect the surplus of the
employers at all because they sell the same amount at
the same price under any rationing scheme.
It does affect consumer surplus, because different
consumers get to buy under different rationing schemes.
If it is efficient rationing, then the consumers who value
the good the most get to buy it---- so CS is higher than
if the consumers who don't value it so much are the
ones able to buy.
Under all but E, producer surplus is changing.
24. Suppose residential demand for electricity has
an elasticity of -.5 and business demand has an
elasticity of -.2. Currently, both are priced the
same. How could the prices be changed to keep
consumer surplus the same but raise profits?
(a) Raise the consumer price and reduce the
business price.
@(b) Reduce the consumer price and raise the
business price.
(c) Raise both prices.
(d) Reduce both prices.
25. Under rate-of-return regulation, a utility
(a) Has no incentive to increase demand.
(b) Has no incentive to reduce costs.
(c) Has no incentive to find cheaper sources of
capital.
(d) Has strong incentive to use equity financing.
@(e) Has strong incentive to attract more
household customers.
26. Suppose MC =30-Q/4, FC=5, and the market
demand curve is Q=80-P The equilibrium number
of firms in the industry is
(a) Zero
@(b) One.
(c) 2-10
(d)11-20
(e) More than 20.
A good way to approach this question is to graph the
MC and AC and demand. You'd see that AC is declining
with output. That means that at most one firm will
operate-- natural monopoly. You'd also see that that the
demand price was above AC for small output, so that one
firm can operate profitably. So the answer is one firm.
27. For reputation to work, it must be that
(a) Costs must be sufficiently high
(b) The price must equal marginal cost
(c) The price must be below marginal cost
@(d) The price is above marginal cost
(e) None of the above.
28. Right-to-work states have
(a) Looser child-labor laws
(b) Higher minimum wages
(c) Mandated health insurance
(d) Stronger unions
@(e) Weaker unions
29. Q=24-P and supply is perfectly elastic at a
price of 8. A sales tax of 1 will reduce quantity
more
(a) If it is imposed on sellers.
(b) If it is imposed on buyers.
(c) If there is a positive externality
(d) If there is a negative externality
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@(e) None of the above
The effect is the same regardless of any of the above
circumstances.
@(b) Between .9 and 4.9 million dollars.
(c) Between 4.9 and 9.9 million dollars
(d) Between 9.9 and 12.9 million dollars.
(e) More than 12.9 million dollars.
30. If the cost of a new regulation is 40 million
dollars this year and the discount rate is 5%, that
is equivalent to what future annual cost?
(a) Between 0 and .9 million dollars.
30. Suppose some employers currently are not
providing daycare to their employees’ children.
Show the effect of mandated employer-provided
daycare on employment and wages.
If the fringe benefit is efficient, reducing wages
more than it increased costs, employers are already
providing it. Hence, we can assume that for firms
presently providing it, daycare is efficient and for
those who are not, it is inefficient. The only effect of a
mandate is to impose it on those who are not providing
it currently, so the effect would be purely inefficient.
Wages would fall whether it was efficient or not.
We can conclude from the inefficiency of the mandate
that employment will fall too, as in the diagram below.
31. Explain franchise bidding.
In franchise bidding, the government tells
companies to bid for the right to sell electricity or
some other service. It can take either the form of
companies bidding how much they will pay the
government (as with Indiana tollways) or how low a
price they will charge the public for the service.
32. Two brothers own a ranch. They are both
hunting for caribou. Show using a game matrix the
problem that will result unless they talk with each
other about their hunting.
We can use the game matrix in Table 12.1 of the
book. Let the brothers be called Row and Column. If
they each hunt a lot of caribou, they will deplete the
stock and both be unhappy. They will do that,
following individual interest, unless they can get
together and make a binding agreement to both only
hunt a little. This might be a legal agreement, or might
be some kind of credible promise, enforced by their
ethical or religious beliefs or by shame at lying.
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33. The company Apex has a total cost of TC =
2+ 4A and the company Brydox has a total cost
of TC= B, where A and B are their outputs. The
market demand facing both firms is Q= 36- P,
where Q=A+B.
(a) Find an equation for Apex’s reaction curve.
Apex’s profit function is
Profit(Apex) = P A – TC_a = (36-A-B)A – 2 – 4A
= 36A- A^2 – BA – 2 – 4A = 32A – A^2 –BA-2
Differentiating yields
dProfit/dA = 32-2A –B =0,
so
32-B = 2A and A= 16-B/2, which is the reaction
function.
(b) Find Apex’s equilibrium output.
Brydox’s profit function is
Profit(Brydox) = P B – TC_b = (36-A-B)B – B =
36B- B^2 – BA – B = 35B – B^2 –BA
Differentiating yields
dProfit/dB = 35-2B –A =0,
so
on the minority. The idea of rational ignorance is that
voters will not become informed about their vote unless
they think it is worth the cost to become informed, and
so will often remain ignorant.
Both of these things lead to government failure, but
in different ways. The problem with the tyranny of the
majority is that a policy will pass a vote even if it
hurts the minority more than it helps the majority. The
problem with rational ignorance is that even the
majority might vote the wrong way, or not vote at all, if
the voters do not bother to become informed. The
problem of rational ignorance will often lead to
something like “tyranny of the minority”, because the
minority will often have more concentrated interests
and thus more incentive to become informed than the
majority.
35. Show what a reaction curve diagram would
look like for two firms when one of them has MC=3
and the other one has MC=10.
We do not have the demand curves, so we cannot
draw this exactly, but the information provided does
tell us something about the reaction curves. Let firm 1
have MC=10 and firm 2 have MC=3. Then the
monopoly quantities are different for the two firms:
Qm1<Qm2, as shown in the figure. The shutdown
price will also be higher for firm 1, so its reaction curve
will hit the axis at a smaller amount of output by its
rival. These two things mean that the intersection of
the two reaction curves will be at a higher output for
the lower-cost firm, firm 2.
35-A = 2B and B= 17.5-A/2, which is the reaction
function.
Solving this with A’s reaction curve yields: A =
16=B/2 = 16- (17.5-A/2)/2 = 16- 8.75+A/4, so
(3/4)A = 7.25 and A = 9.67.
34. Explain how the ideas of the tyranny of the
majority and rational ignorance are alike and
unlike each other.
The idea of the tyranny of the majority is that the
majority of voters in a democracy can impose their will
36. Why does Levitt think we should use climate
engineering instead of a carbon tax?
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He has two reasons. (1) A carbon tax will reduce
emissions, but that will only delay warming, not stop
it. Warming will continue for many years, and
eventually reach the same high temperatures it would
without the carbon tax. (2) Reducing emissions is
very expensive—over a trillion dollars per year--whereas geoengineering is extremely cheap by
comparison. Thus, if the goal is to maximize net
benefit or reduce net cost, geoengineering is superior.
without exorbitant cost it doesn’t seem to be a
permanent solution, and if the discount rate is low, the
costs of warming further out than 100 years would
matter more than with a high discount rate.
37. Levitt omits a major reason why global
engineering is a more practical solution than
carbon taxes. What is that? Discuss.
(a) What is the equilibrium price and quantity of
labor? Show this using a diagram.
He omits the difficulty of implementation because of
the international free rider problem. Carbon taxes
must be imposed worldwide, or some countries will
keep on increasing their emissions. In fact, the nontaxing countries will increase emissions all the faster,
because their industries will be advantaged and will
export carbon-heavy goods to the high-tax countries.
The non-taxing countries will see no need to tax if
other countries are doing the taxing, and no country
can benefit by unilaterally imposing a carbon tax. In
addition, some countries will prefer global warming to
a carbon tax even if a carbon tax could be imposed
worldwide—India and Russia, for example.
Geoengineering, on the other hand, can be done
unilaterally, and it is cheap enough that one mediumsized country could find it profitable to do it even if it
had to bear the entire cost itself.
He also omits the advantage that geoengineering can
be tried on a smaller scale, and later, so that if
warming turns out not to be such a problem, large costs
have not been incurred.
38. Would a higher discount rate make Levitt’s
solution for global warming more attractive or less
attractive relative to cap-and-trade? Discuss.
With a high discount rate, geoengineering is more
attractive because its cost could be delayed till many
years from now, whereas to significantly delay global
warming a cap-and-trade policy would have to start in
the next fifty years. On the other hand, if discount
rates are very low, cap-and-trade has the problem that
39. 4. In Smallville, 50 workers will work for as
little as $10/hour and 200 workers will work for as
little as $20/hour. The number of jobs employers
will offer is L where L = 100-2W.
If W=10 then L = 80 from the demand curve, but
supply would be 200, so that can’t be the equilibrium.
If W=20 then L= 60 from the demand curve, so that
is the equilibrium.
(b) What is the workers’ surplus in equilibrium?
50 workers would get a surplus of (20-10), for a total
of 500. The other 10 workers would have a surplus of
0.
40. Discuss the advantages and disadvantages of
three different government policies for dealing with
the dangers of muscle-building drugs.
Here are three policies:
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1. Ban the drugs. This will stop the danger, but will
also prevent people from using it who are aware of the
dangers but want the benefits.
2. Require each drug to be sold with a warning label
about its dangers. This will inform users, but will
require some cost for the labels and the warnings may
not be understood or even read by many users,
especially if they just obtain pills from coaches or
friends.
3. Require each drug to be sold only if the buyer signs
off on a special paper saying he is aware of the
dangers. This will also inform users, and will make it
more likely that they read the warnings. It will greatly
increase the cost, tho, if this paperwork has to be filed
away as proof it was done.
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The SuperFreakonomics Global-Warming Fact Quiz
Steven D. Levitt
10/23/2009 | 4:05 pm
http://www.freakonomics.com/2009/10/23/the-superfreakonomics-global-warming-fact-quiz/
By the time you finish this blog post, you will understand why we differ from our critics in our conclusions.
As we write in SuperFreakonomics, there are many misconceptions about the facts surrounding global warming. Take the following
true/false quiz to test your knowledge of the science, economics, and technology of global warming.
Global-warming science questions:
1. The Earth has gotten substantially warmer over the past 100 years.
TRUE / FALSE
2. Even if we were to immediately and permanently stabilize our carbon emissions at the current levels, or even cut these emissions
substantially, climate models predict that Earth will continue to get warmer for decades.
TRUE / FALSE
3. When Mt. Pinatubo erupted in 1991, it spewed millions of tons of sulfur dioxide into the stratosphere. Scientists believe that the haze
generated by the eruption reflected some of the Sun’s light, causing the Earth’s temperature to temporarily drop as a consequence.
TRUE / FALSE
4. Because the half-life of sulfur dioxide in the stratosphere is relatively short (on the order of one year), the cooling effects of the Mt.
Pinatubo eruption faded within a few years.
TRUE / FALSE
5. Dark surfaces absorb more sunlight than light surfaces. Thus, all else equal, light surfaces cause less global warming because more of the
sunlight that strikes these surfaces is reflected back into space.
TRUE / FALSE
6. Clouds, which are white or gray, are lighter in color than the oceans, which are blue.
TRUE / FALSE
The correct answer to all six of these questions, we believe, is “TRUE.” You can see our chapter on global warming (pp. 165-209) and
particularly the endnotes (pp. 247-256) for citations and elaboration. It is our impression that none of the six scientific statements above is
at all controversial among climate scientists. I do not believe that any of our global-warming critics would quibble with any of these facts.
And just to be perfectly clear, despite all the bluster that has surrounded our chapter on global warming, these are the six scientific facts
that are critical to our analysis of geo-engineering in that chapter, a point I will expand upon below. We document many other interesting
facts in the chapter, but these are the only ones that are central to our argument.
It is simply not the case that criticisms of the geo-engineering solutions that we highlight in the chapter arise because we get the scientific
facts wrong, unless the critics think that any of the six statements above are false.
So let’s move on to the economic issues surrounding global warming, and let’s see if that is where we differ from the critics in our
assumptions.
Global warming economics questions:
1. If the Earth’s warming leads to global catastrophe, that would be a really bad outcome.
TRUE / FALSE
2. Even when there is enormous uncertainty about the likelihood of future cataclysms, it makes sense to invest now in finding ways to avoid
such cataclysms.
TRUE / FALSE
3. Economists estimate that the costs of reducing carbon emissions are likely to be upwards of $1 trillion per year.
TRUE / FALSE
The correct answer to all three of these economic questions is “TRUE.” These are the three key economic facts that are critical to the
arguments in our chapter. The first question doesn’t require any further explanation. The answer to the second question has been
hammered home by Martin Weitzman‘s work in the area, which we cite in SuperFreakonomics, as well as a newer paper that Weitzman has
written. The third fact is based on the analysis of Nicholas Stern. These cost estimates are obviously highly speculative, but the true cost of
reducing carbon emissions is likely to be within two orders of magnitude of this number.
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As far as I know, none of our critics would disagree with any of these three economic facts about global warming. Indeed, Paul Krugman‘s
attack of our chapter largely focuses on the misconception that we do not agree with fact No. 2, when clearly we do. Somehow Krugman has
come to the conclusion that we are in favor of inaction, missing the main point of the chapter, which is that we think immediate and
aggressive action is warranted, in the form of investment in (or implementation of) geoengineering solutions. Perhaps Krugman does not
consider those steps taking action.
So if there is no disagreement on either the six key scientific facts or the three key economic facts, where is the disagreement coming from?
Perhaps it is coming from a lack of agreement over technological facts.
Global warming technological questions:
1. There exists an engineering design that provides a means of delivering enough sulfur dioxide to the stratosphere on a continuous basis to
effectively cool the Earth. The estimated cost of building and implementing this technology is a few hundred million dollars.
TRUE / FALSE
2. There exists an engineering design that provides a means of increasing oceanic cloud cover by seeding such clouds with salt-water that is
sprayed into the air by a fleet of solar powered dinghies. The estimated cost of building and implementing this technology is a few hundred
million dollars.
TRUE / FALSE
The answer to these questions is once again “TRUE.” As we describe in SuperFreakonomics, the Seattle-based company Intellectual
Ventures has designs for both a “stratoshield” (No. 1) and the cloud-seeding project (No. 2).
I don’t see how the critics could argue with the answers to those two questions. They might argue that the technology won’t work as
Intellectual Ventures hopes it will, but there is no arguing with the fact that Intellectual Ventures has the blueprints to try to build these
contraptions, and could have them up and working within a year or two.
With all of this as preamble, let’s get to the fundamental question we try to answer in the chapter:
If we need to cool the Earth in a hurry, what is the best way to do it?
Our answer to that question follows directly from the three sets of facts I presented above. Reducing carbon emissions is not a great way
of cooling the Earth in a hurry for two key reasons: (1) even if we cut carbon emissions today, the Earth will continue warming for decades;
and (2) reducing carbon emissions is expensive, with a price tag of at least $1 trillion per year. (There is a third problem with reducing
carbon emissions, which is that it requires worldwide behavioral change, which will be hard to achieve. But even beyond that, carbon
mitigation is not a great solution to the question posed above. There might be other significant benefits tor reducing carbon emissions —
addressing ocean acidification, for instance.)
A much better approach, we conclude, is geoengineering. The scientific evidence suggests that either the stratoshield or increased oceanic
clouds would have a large and immediate impact on cooling the Earth, unlike carbon-emission reductions. The cost of these solutions is
trivial compared to the cost of lowering carbon emissions — literally thousands of times cheaper! Perhaps best of all, if something goes
wrong and we decide we don’t like the results of the stratoshield or the oceanic clouds, we can stop the programs immediately and any
effects will quickly disappear. These two geo-engineering solutions are completely reversible. Given the huge costs of global cataclysm and
how cheap the solutions are, it would be crazy not to move forward with geoengineering research in order to have these solutions ready to
go in case we decide we need to cool the Earth.
Why then, are our our conclusions so radically different from those of our critics? The answer:
We are answering a different question than our critics.
Our question, at noted above, is what is the cheapest, fastest way to quickly cool the Earth. Like every question we tackle in
Freakonomics and SuperFreakonomics, we approach the question like economists, using data and logic to conclude that the answer to that
question is geo-engineering. Not coincidentally, almost every economist who has asked the same question has come to the same conclusion,
including Martin Weitzman and the economists at the Copenhagen Consensus.
But that is not the question that Al Gore and the climate scientists are trying to answer. The sorts of questions they tend to ask are “What
is the ‘right’ amount of carbon to emit?” or “Is it moral for this generation to put carbon into the air when future generations will pay the
price?” or “What are the responsibilities of humankind to the planet?”
Unlike the question that we are asking — How can we most efficiently cool the Earth fast? — the types of questions that
environmentalists are trying to answer mix together both scientific issues and moral/ethical issues. If you have any doubts about this,
watch Al Gore’s movie, in which he says explicitly that reducing carbon emissions is not a political issue, but a moral issue.
That is why someone like Ken Caldeira can agree with the facts presented in our chapter, say that the chapter is written in good faith, but
still disagree with the conclusion that geoengineering is the answer. It is because the question Ken Caldeira is trying to answer is not the
question we are trying to answer. The same is true of our critics. But instead of just making this simple point — that we are asking different
questions — the critics have either intentionally or unintentionally confused the issues by making all sorts of extraneous arguments.
I do not mean to imply that the question we answer in the book is the most important question. It may be that the questions that
environmentalists are trying to ask are more important and more interesting, but that certainly does not mean that we don’t want to know
the answer to our question, a question that the environmentalists don’t bother to ask very often because they are focused on their more
philosophical questions.
So for all the blogosphere shouting against our chapter, I have to be honest and say that I just don’t get it. I can’t understand why any
environmentalist who really cares about the Earth’s future could say with a straight face that geoengineering doesn’t deserve a seat at the
table as the global-warming debate heats up.
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