Final 2012: EEP1/ Econ 3
Berck, Chaidez, Qu
Do All 6 Questions
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4
(6 pts--1 pt each) Explain why each statement is true, false or uncertain.
a. Competitive firms choose price so that price equals average cost.
b. When price is below the minimum point of average cost a firm should chose positive production
and there will be negative profits.
c. Net National Product includes the value of work done at home and of clean air while Gross
National Product does not.
d. The bundle a consumer demands can be found from the tangency of a budget constraint to an
isoquant.
e. Public goods are underproduced.
f. An argument for using a below market interest rate for government projects is that the market
interest rate does not reflect the preferences of those already dead.
(7 pts) Four students share a bathroom and it is only as clean as they make it. Bathroom cleanliness is
measured in total hours of cleaning per week , the total being taken over all the students. Two of the
students have p = 7 – htotal as their demand for cleanliness. The other two have p = 6 -2 htotal as their
demand for cleanliness. In both cases, p is not negative, that is, if enough work is done their valuation is
zero. All students value their time at $2/hour.
a. The students act independently of each other (they make no agreements.) How much work in total
will be done to clean the bathroom? (2 pts)
b. Suppose instead that the students sit down over a cup of tea and work out a Pareto optimal
solution to their problem. How much work is done? Can you tell who does it? Explain. (3 pts)
c. Students are required to spend 1.5 hours each cleaning the bathroom. If they do not do their share,
they are fined $4.00 per hour for each hour of undone work.. How clean is it now? Who works
and how much? (2 pt)
(7 pts) Use a diagram with cost curves and a demand curve to show how the costs to the consumers are
affected in the short run and the long run by a tax on pollution. You may assume that the tax adds t $/unit
to the marginal cost of each firm. What does this do to average cost? Now assume that there are three
firms in the industry in the short run.. Show how the short run supply curve changes with the tax. Now
show how the long run supply curve and the long run competitive equilibrium changes with the tax.
(8 pts) Profits associated with polluting for Friedman Inc. are   40Q  2Q2, where Q  pollution
emitted (in tons), and profits are measured in dollars. Marginal benefits (MB) of polluting, derived from
this function, are MB  40  4Q.
a. How much pollution do you expect Friedman to produce in the absence of pollution
regulation? (1 pt)
b. The damages (costs) associated with pollution from Friedman are estimated as
Damages  D  3Q2, where damages are measured in dollars. What are the damages (costs)
associated with Friedman’s unregulated level of pollution? What are the net benefits at this
point? (2 pts)
c. The marginal damages (costs) associated with that function are MD = 6Q. What is the efficient
level of pollution? What are total benefits and costs at the efficient level of pollution? What is
the level of net benefits at this point? (1 pt)
d. What are the marginal benefits and costs at the efficient level of pollution? (1 pt)
e. Suppose that the damages affect only one person, Samuelson, and Friedman has a clear
right to emit as much as it likes. Samuelson and Friedman can negotiate at no cost. With no
government regulatory programs, how much do you expect the firm to pollute? Why? (1 pt)
f. Now suppose the damages affect only Samuelson, who has a clear right to be free of harm
from pollution. Samuelson and Friedman can negotiate at no cost. With no government
regulatory programs, how much do you expect the firm to pollute? Why? (1 pt)
g. Suppose the damages affect only Samuelson, who has a clear right to be free of harm from
pollution. Now, though, enforcing that right will require Samuelson to spend $500 in legal fees.
With no government regulatory programs, how much do you expect Friedman to pollute, and
why?" (1 pt)
5
6
(6 pts---1 pt each) Answer each question briefly:
a. What type of values can be measured by a stated preference method? by a revealed preference
method?
b. Describe a conjoint analysis.
c. Name at least four steps that are necessary in a contingent valuation study.
d. What is existence value?
e. What is option value?
f. What is willingness to accept?
(6 pts) On demand.
a. Draw a diagram with indifference curves and budget constraints and use it to show how a
consumer changes his demand for the good on the horizontal axis when its price changes.
Carefully label your diagram, paying particular attention to the chosen bundles. In your
explanation, be sure to explain how the diagram can be used to find the price of the good. (4 pts)
b. Now add one more line to your diagram and use it to find equivalent variation. Explain. (2 pts)