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101_Final_Q_A__05 - Cornell University Department of...

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Cornell University Professor R.H. Frank Department of Economics Spring 2005 Economics 101 Final Examination Multiple Choice. Choose the best answer. (3 points each) On the bubble sheet, fill in the best response for each question
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QUESTIONS 1-2 REFER TO THE INFORMATION IN THE TABLE BELOW Two firms, X and Y, have access to five different production processes, each one of which gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of daily smoke emissions are listed in the table (e.g., process A emits 4 tons per day, B emits 3 tons per day, etc.): Process A (4) B (3) C (2) D (1) E (0) Total Cost to X 230 260 300 380 480 Total Cost to Y 100 120 150 185 225 1. Pollution is currently unregulated, but the government is considering a plan to require a daily permit for each ton of smoke emitted each day. Among the following prices per 1-ton daily permit, which of the following is the SMALLEST price the government could charge and still reach its goal of cutting total pollution by 75 percent? a. $41 b. $51 c. $61 d. $71 e. $81 a. At a price of $41 per permit, X will demand 2 permits and Y will demand no permits. 2. Suppose that instead of following the permit approach, the government simply required each firm to cut its current pollution by 75 percent. How much economic surplus would be lost each day by using this plan instead of the permit plan? e. The cost of the pollution reduction under the permit plan is $70 (X’s cost) +$125 (Y’s cost) = $195. When each reduces pollution by 75 percent, the cost is $150 (X’s cost) + $85 (Y’s cost) = $235. The difference is $40. 3. Doug and Mike are considering sharing an apartment in Fall Creek for $1300/mo. If they don’t share they can live separately for $800/mo. each. Apart from the rent they are indifferent between living together and living apart, except for one problem: Doug smokes and Mike dislikes being around smoke. Doug would be willing to pay up to $250 a month to be able to smoke at home. Mike would be willing to tolerate smoke at home for a payment of at least $260/mo. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together? a. Doug pays $650/mo., Mike pays $650/mo. b. Doug pays $600/mo., Mike pays $700/mo. c. Doug pays $575/mo., Mike pays $725/mo. d. Doug pays $525/mo., Mike pays $775/mo. e. There is no distribution of rents that will work. d. The savings in rent from shared living is $300/mo. The least costly solution to the smoke problem is to have Doug discontinue smoking ($250 cost to Doug). The total surplus from living together is $50. Doug’s reservation rent would be $550/mo and Mike’s would be $800/mo. If they split the surplus equally, Doug will pay $525 and Mike will pay $775. QUESTIONS 4 and 5 REFER TO THE INFORMATION BELOW An Upstate New York village has four residents and a common grazing land. George Pataki has just given each of the four residents $400 from the “New York Small Village Benefits Fund.” Each of the four villagers can invest the $400 in a bond that pays 10 percent interest after one year, or can use it to purchase a one-year-old llama to graze on the commons.
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101_Final_Q_A__05 - Cornell University Department of...

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