Final Exam
Professor Peter Berck
Fall 2006
Time allowed: 3 hours
The Exam is a total of 40 points. Answer all SIX questions.
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)