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# practicefinalsol - PRACTICE FINAL SHORT QUESTIONS: 1) Using...

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PRACTICE FINAL SHORT QUESTIONS: 1) Using a graph, discuss the welfare effects of an import tariff. Who gains, who looses from the tariff, and what are the net welfare effects? A+B+C+D: loss in consumer surplus A: increase in producer surplus C: government revenue from tariff B+D: net welfare loss 2) Provide a definition for “externality”. Give an example of negative externalities. Externalities: Effects through which one market participant affects another one’s utility or technology indirectly. Traffic and pollution are negative externalities. 3) True or false? The allocation of tax burden between consumers and producers depends on whether the tax is imposed on consumers or producers. If true, explain why. If false, why does it depend on? False. Who bears most of the tax burden, as well as the size of the social loss, depends on the elasticities of demand and supply. The analysis is independent of whether tax is levied on producers or consumers. Q A C D B t P P world

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4) a) The total endowment of good X is ______. The total endowment of good X is X A + X B = 25 + 15 = 40. b) True or false? Point S is on the contract curve. False. Point S is not a Pareto optimal allocation (any allocation in the lens-shaped region makes both individuals better off), so point S cannot lie on the contract curve. c) At point R, MRS A is GREATER THAN; EQUAL TO; SMALLER THAN MRS B . The Pareto optimal allocation that has MRS A = MRS B will be within the lens created from the intersections of IC A and IC B . As we move along IC A from point R towards point S, the slope of IC A , and hence MRS A decreases. On the other hand, as we move along IC B from point R towards point S, the slope of IC B , and hence MRS B increases. This means at point R, MRS A is GREATER THAN MRS B . d) At point S, MRS A is GREATER THAN; EQUAL TO; SMALLER THAN MRS B . The Pareto optimal allocation that has MRS A = MRS B will be within the lens created from the intersections of IC A and IC B . As we move along IC A from point S towards point R, the slope of IC A , and hence MRS A increases. On the other hand,
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## This document was uploaded on 10/10/2008.

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practicefinalsol - PRACTICE FINAL SHORT QUESTIONS: 1) Using...

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