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University Of Arizona - ECON 200 Homework 8 - All Solutions Worked out

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1. Hotel rooms in Smalltown go for$100 and 1,000 rooms are rented on a typical day.
a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room.
After the tax is imposed, the going rate for hotel rooms rises to $108 and the number
of rims rented falls to 900. Calculate the amount of revenue this tax raises for
Smalltown and the deadweight loss of the tax. (Hint: The area of a triangle is ½
times base times height) Solutions available at https://bit.ly/2W2spcR
b. The mayor now doubles the tax to $20. The price raises to #116, and the number of
rooms rented falls to 800. Calculate tax revenue and deadweight lost with this larger
tax. Do they double, more than double or less than double?
Solutions available at https://bit.ly/2W2spcR
2. Consider the market for fire extinguishers.
a. Why might fire extinguishers exhibit positive externalities?
b. Draw a graph of the market for fire extinguishers, labeling the demand curve, the
social value curve, the supply curve and the social cost curve.
c. Indicate the market equilibrium level of output and the efficient level of output.
Give an intuitive explanation for why these quantities differ
d. If the external benefit is $10 per extinguisher, describe a government policy that
would yield the efficient outcome.
Solutions available at https://bit.ly/2W2spcR
3.
Think about the goods and services provided by your local government. Using the classification we
said in the class, explain which category each of the following goods falls into:
a.
Police protection
b.
Snow plowing
c.
Education
d.
Rural roads
City streets
Solutions available at https://bit.ly/2W2spcR
e.
4.
Both public goods and common resources involve externalities.
a.
Are the externalities associated with public goods generally positive or negative? Use
example in your answer. Is the free market quantity of public goods generally greater or less
than the efficient quantity?
b.
Are the externalities associated with common resources generally positive or negative?
c.
Use example in your answer. Is the free market quantity of common resources generally
greater or less than the efficient quantity?
5.
Wireless, high speed internet is provided free in the airport of the city of CommunityVille.
a.
At first, only a few people use th eservice. What types of a good is this and why?
b.
Eventually, as more people find out about the service and start using it, the speed of the
connecting begins to fall. Now what type of a good is the wireless Internet Service?
What problem might result and why? What is one possible way to correct this problem? Solutions
available at https://bit.ly/2W2spcR
6.
Many transportation systems, such as the Washington D.C., Metro, charge higher fares during rush
hours that during the rest of the day. Why might they do this?
7.
The federal government tests the safety of car models and provides the test results free of charge to
public. Do you think this information qualifies as public good? Why or why not?
Solutions available at https://bit.ly/2W2spcR
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