1997 Final Exam

Final Exam. 1997 EEP 1
Answer all questions. The total is 50 points.
(7 points) What does the tangency between an isocost line and an isoquant represent? How
would one derive a cost schedule, c(q), using various isocost lines and isoquants. What would
happen to this cost schedule if the prices of all inputs doubled?
(9 points) Deficiency Payment Program
Using an appropriate diagram, explain a target price, deficiency payment program.
Use a separate diagram to clearly illustrate the deadweight loss to this program.
What is decoupling? Why would the government want to decouple?
(9 points) Monopolist with an upward sloping MC curve which intersects the vertical axis at 0.
Demand curve is downward sloping.
Clearly explain the profit maximizing output choice for a monopolist. You can use
graphs, algebra, and/ or words.
Now, draw a separate picture to illustrate a situation where the monopolist chooses to
produce nothing. Give a short explanation. (Hint: when does a competetive producer
produce nothing)
Now draw a separate picture to illustrate a situation where the monopolist makes zero
profits even though he produces something. Give a short explanation.
(9 points) Air Regulation (Short answers suffice for all of the following).
How is air quality regulated in the United States. Be sure to include the roles of Federal
and State governments and the differences between stationary and mobile sources.
More recent regulations include markets. Give an example. Draw a diagram to show
that both markets and technology based effluent standards can achieve the same level of
clean air. Explain.
Why, then, are markets for pollution permits being implemented? Why would a less
developed country fear a "carbon market" more than a restriction on carbon dioxide
(9 points) It is generally agreed that pollution is bad, yet there is pollution.
Why do we observe pollution, particularly in situations with minimal governmental
intervention? Does this contradict the first welfare theorem, which states that a
competetive equilibrium is a Pareto optimum?
Define a Pareto Optima. Give an example of a Pareto Optimal Allocation in which there
is pollution.
Some advocate a market approach to controlling pollution. It is claimed that the amount
of pollution in the air is independent of whether the polluter or the victim of pollution
owns the right to clean air. Explain how this can be true.
(7 points) In a two good world, the price of the second good is one and the price of the first good
is two. A customer chooses to buy three units of the first good at these prices. The consumer is
then offered a deal. He may buy more units of the first good at half that price. (Assume that this
customer has moon shaped indifference curves.)
Draw a diagram that includes both the original and modified budget constraints.
(Carefully mark both the vertical and horizontal intercepts for both budget constraints.)
Use a separate diagram to illustrate that the consumer will always increase his purchase
of good 1.
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