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Final Exam Professor Peter Berck EEP1/ECON3 Fall 2006 Time allowed: 3 hours The Exam is a total of 40 points. Answer all SIX questions. READ THESE INSTRUCTIONS CAREFULLY: Clearly label one of your bluebooks “A” and label the other bluebook “B”. Answer questions 1, 2 and 3 in book “A”. Answer questions 4, 5, and 6 in book “B”. Book A -- Question 1 (8 points) Briefly define each of the following (1pt each) a) Consumer surplus b) Pareto Optimal c) Appropriative rights d) Loan program e) Public good f) Isoquant curve g) Open Access (as in a fishery) h) Coase Theorem Book A -- Question 2 (6 points) Assume that the supply function for ethanol, used as a gas additive, is positively sloped and has the form qs = 2p - 4 where p > 2 and the demand for ethanol is qd = 20 – p Prices are in dollars. a) Given these demand and supply functions, what is the equilibrium price and quantity? (1pt) b) Assume that a subsidy of $6 per unit is imposed by the government. (3pts) i) What is the new price paid by the consumer? ii) What is the new price received by the producer? iii) What is the new quantity in the market? c) Assume that ethanol in gasoline has no environmental benefit. What is the deadweight loss caused by the subsidy? Show DWL graphically and calculate it exactly. (2pts) Book A -- Question 3 (6 points) a) Use a diagram with isoquants and isocost lines to explain a technology based effluent standard. (1pt) b) Now show on your diagram how the same input combination could be achieved by a tax on effluent. (1pt) c) Explain what you did in parts (a) and (b). (2pts) d) Do these two ways of regulating effluent have exactly the same economic effects? If not, what are the differences? (2pts) There are SIX questions in total on this exam – turn over the page. Book B --Question 4 (7 points) Assume that there are two goods, wine and burritos, whose prices are PW = 8 and PB =4. Income is 48. a) Draw a diagram with this budget constraint and indifference curves for a consumer who would choose the bundle xW= 4 and xB = 4. Draw wine on the vertical axis and label the intercepts. (2pts) b) Explain why this consumer would make this choice of bundle. (1pts) c) Now suppose income increased to 60 and prices are still PW = 8 and PB =4, and that the consumer buys 6 units of wine. How many burritos does he buy? Draw the new budget constraint and an indifference curve showing the new chosen bundle. (2pts) d) Describe these goods. Are they normal or inferior goods? (2pts) Book B -- Question 5 (6 points) a) 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. (3pts) b) Describe a tax, a standard and a tradable permit system to regulate air pollution. What is an advantage of each type of system? (3pts) Book B -- Question 6 (7 points) a) Draw a diagram to show a monopolist’s output and price. (1pt) b) Suppose that there is a negative externality (t dollars of damage per unit of output) associated with the monopolist’s production. On the same diagram as above, draw a curve describing the total or social marginal cost of production. What is the socially efficient level of output? (2pts) c) Given your diagram in part (a), show the deadweight loss when the monopolist pollutes. Can the monopoly solution have no DWL? (2pts) d) Now suppose that the government sets a tax on the monopolist equal to t dollars per unit of output. Does this tax lead to the socially efficient level of output? Use a diagram to prove your assertion. You may draw a new diagram if necessary. (2pts)