II.
With reference to the diagram below, answer the following questions.
(10 points in total - 1 point each)
B’s Chips
Chips
p
Beer
OB
B1
B3
B2
d
M1
A’s
Beer
B4
c
A5
•
W
A4
B’s
Beer
A3
b
B5
p
a
A2
Beer
A1
OA
A’s Chips
1. Relative to the endowment point W, a Pareto improvement would be:
a. A trade to point a
b. A trade to point d
c. A trade to point b
d. A trade to origin OB
2. Relative to W, what area in the diagram represents the “core”? Explain your answer.
3. Draw in the contract curve of exchange, and explain why you drew it that way.
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Chips
4. The relevant part of the contract curve given the initial endowment point W is:
a. a to b
b. b to c
c. Origin OA to a
d. c to d
5. At M1, the gains from trade:
a. Have not been exhausted
b. Are equal for A and B
c. Have been exhausted
d. Are not equal for A and B
6. If beer production technology became more efficient, the Edgeworth Box:
a. Gets taller and wider
b. Gets wider
c. Gets taller
d. Falls over
7. The price line pp results in a competitive equilibrium at M1 because:
a. A and B’s marginal rates of substitution are not equal
b. A and B’s marginal rates of substitution are steeper than at W
c. A and B’s marginal rates of substitution are equal
d. A and B’s marginal rates of substitution are less steep than at W
8. Along the price line pp:
a. A’s wealth increases
b. B’s wealth declines
c. A and B’s wealth remains the same
d. A and B’s wealth declines
9. In trading from endowment point W to M1:
a. B demands more chips and supplies more beer
b. B supplies more chips and supplies more beer
c. B supplies more chips and demands more beer
d. B demands more chips and demands more beer
10. A good way to reallocate the initial endowment W would be to:
a. Lower the price of beer and raise the price of chips
b. Raise the price of beer and lower the price of chips
c. Lower the price of beer and lower the price of chips
d. None of the above
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III.
With reference to the diagram below, answer the following questions.
(10 points in total - 1 point each)
MACS,
MPCf
MPCf
MACS
a
b
0
e
c
g
f
d
x1
g
x2
x3
x4
Steel
(Pollution)
11. The fishery’s marginal pollution costs MPCf are:
a. The addition to their total costs of producing an extra unit of fish
b. The addition to their costs of producing an extra unit of pollution
c. The addition to their costs of the steel mill producing an extra unit of pollution
d. None of the above
12. In the absence of bargaining, and if the fishery owns the property rights to water, pollution would
be at:
a. x4
b. x2
c. x3
d. 0
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13. The net benefit to the steel mill from purchasing property rights from the fishery to pollute at x1
would be:
a. (a + b) - a
b. a – b
c. b – a
d. (a + b) - b
14. x2 is the Pareto efficient level of pollution if the fishery has property rights because:
a. MACs > MPCf
b. MACs = MPCf
c. MACs < MPCf
d. MACs = 0
15. Draw the equilibrium price of property rights, and explain why you drew it this way.
16. In the absence of bargaining, and if the steel mill owns the property rights to the water, pollution
would be at:
a. x4
b. x2
c. x3
d. 0
17. The net benefit to the fishery from purchasing property rights from the steel mill, the latter
cutting pollution from x3 to x2 would be:
a. (e + f) – f
b. e – f
c. f – e
d. (e + f) - e
18. When the steel mill has the property rights, the supply curve for rights is MPCf:
a. True
b. False
19. The equilibrium price for and quantity of pollution will be:
a. Different depending on who owns the property rights to the water
b. The same irrespective of who owns the property rights to the water
c. It all depends on the number of fish in the fishery
d. Who knows
20. Both the fishery and steel mill would most likely be truthful about their costs and benefits from
pollution:
a. True
b. False
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IV.
Indicate whether the following statements are either true or false. Carefully explain
your choice of answer. Use diagrams if they will help your answers.
(1 point for true/false, 9 points for explanation)
21. “If an initial endowment point is not Pareto efficient, it is impossible to make one individual
better off without making another individual worse off.”
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22. “A polluting firm that is maximizing its profits will also be minimizing its marginal pollution
abatement costs.”
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V.
Bonus Questions
(5 points total – 2 and 3 points respectively)
23.
Suppose in an exchange economy, there are 100 cases of Pabst Blue Ribbon and 30 bags of
tortilla chips, where Tony Stewart starts out with 70 cases of Pabst Blue Ribbon and 15 bags
of tortilla chips. How many cases of Pabst Blue Ribbon and bags of tortilla chips does Dale
Earnhardt Jr. start with? If the price of a case of Pabst Blue Ribbon is $15/case and the price
of a bag of tortilla chips is $2.50/packet, what are the values of Tony Stewart and Dale
Earnhardt Jr.’s endowments respectively?
24.
With a concave production possibilities frontier, and convex community indifference curves,
use a diagram to show how the Edgeworth Box of Exchange is derived when we allow for
production. Briefly state what happens to the production possibility curve if the stock of
capital and supply of labor both decrease.
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