ECON_1110_Prelim2_FINAL2_sol - 2 ECON 1110 Preliminary Exam...

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2 ECON 1110 – Preliminary Exam #2– Fall 2008 SOLUTIONS Answer all 25 multiple choice questions on the accompanying bubble sheet. The exam is closed-book and closed-notes. No electronic devises are permitted during the exam. Unless explicitly stated, you must assume that demand curves are downward sloping and supply curves are upward sloping. Use the following table to answer questions 1 and 2. The table below shows the private costs to producing cattle in southern Florida (MPC). In addition, due to the damage caused by cattle ranching in the everglades, there are significant externalities. The externalities are given under the column MEC (Note that the MEC column gives the marginal external costs). Cows can be sold on the world market for $12 per unit, regardless of how many are produced (that is, the marginal social value of a cow is $12). Unit MPC MEC 1 7 1 2 8 2 3 9 3 4 10 4 5 11 5 6 12 6 7 13 7 8 14 8 9 15 9 10 16 10 1. If transaction costs are low, property rights are well-defined, enforceable and transferrable, and cattle farmers have the right to produce as many cattle as they desire, then which of the following is true? a. The equilibrium quantity of cattle produced will be 6. b. The equilibrium quantity of cattle produced will be 3, and ranchers will be worse off than if transaction costs were high. c. The equilibrium quantity of cattle produced will be 3, and ranchers will be better off than if transaction costs were high. d. The equilibrium quantity of cattle produced will be zero. e. None of the above. 2. If transaction costs are high, what per unit tax in the cattle industry will achieve the efficient outcome? a. 0 b. $3 c. $6 d. $10 e. Infinite 1
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3. The reason that the government enforces patents is a. To increase the number of new patents b. To increase the gains from trade c. Otherwise new ideas would be a pure public good d. To increase the profitability of developing new ideas. e. All of the above 4. Closed-pen fishing is a process whereby pens of fish are raised in the ocean (or rivers, lakes, etc). The fish are raised from eggs to harvestable size. Pen fishing is much like raising chickens in that the pen fishing controls all inputs, and can decide when and how many fish to harvest. Closed- pen fishing has many pros and cons (like all activities). One advantage to closed-pen fishing relative to standard open-ocean fishing is a. Closed pen fishing is a public good b. It converts rival, non-excludable ocean fishing into rival, excludable pen fishing c. It converts non-rival, excludable ocean fishing into rival, non-excludable pen fishing d. It converts non-rival, non-excludable ocean fishing into non-rival, excludable pen fishing e. None of the above Use the following graph to answer question 5. The tobacco market generates positive external costs and negative external values, as indicated by the following graph. V
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ECON_1110_Prelim2_FINAL2_sol - 2 ECON 1110 Preliminary Exam...

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