EnvEcon 1 / Econ 3
Quiz 1
P. Berck
Fall 2006
Answer all four of the following questions in your blue book. Each of the four questions is
worth five points for a total of 20 points.
1. Define:
a. Substitute goods
b. Externality
c. Indifference Curves
d. Public Good
e. Demand and Quantity demanded
2. Assume the market supply and demand equations for wine are
QD  100  4 P
QS  6 P  40
a....Graph the two equations and determine (graphically and algebraically) the
equilibrium price and quantity.
b. Now, the government wants to impose $2 specific tax on wine. Use algebra to find
the new equilibrium prices (price consumers pay and the price producers receive),
quantity and government tax revenue.
3. Draw a diagram and use it to explain the “loan program” agricultural price support
program. Be sure to show quantities produced and consumed and government purchases.
4. Assume that the price of the good on the vertical axis is TWO. Note that the vertical axis
does not go all the way down to zero! The good on the horizontal axis is electricity.
Look at the diagram below;
EnvEcon 1 / Econ 3
Quiz 1
P. Berck
Fall 2006
10100
10000
9900
9800
9700
9600
9500
0
1
2
3
4
5
6
7
8
9
10
.
a. What are the prices of electricity on each of the two budget constraints?
b. How much electricity is purchased at each of these two prices?
c. Assume that the consumer originally faced a high price for electricity and the
diagram shows the results of lowering that price. How many dollars would this
change in price be worth to the consumer? Find your answer by drawing one
more line on the diagram. Explain what you have done. (Slight extra credit for
identifying whether you have used CV or EV.)