2 - Econ 423 Exam#1 Spring 2004 Prof Hackett Your Name_KEY...

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Econ 423 Exam #1, Spring 2004 – Prof Hackett Your Name: _________ KEY _____________ PART I -- 1. (12 pts) Suppose that in addition to the status quo (current management system), four policy options are being considered in the context of a natural resource management decision. Five members of society are affected by the management decision. The table below shows how these five people feel about the proposed management options relative to the status quo. The numbers represent the amount (in units of utility) by which the different options make them better off or worse off relative to the status quo. Policy Options Affected Members of Society Net Social Utility Arnold Jaime Sharita Brigit Hideo
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Option A 60 -20 30 40 120 230 Option B 30 0 20 -20 170 200 Option C 0 15 15 30 30 90 Option D -30 30 0 -30 200 170 1.a. Compute the net social utility for each option and report it in the table above. 1.b. Which of the above options, if any, is Pareto efficient relative to the status quo? ____ C ____ 1.c. Which of the above options, if any, is Kaldor-Hicks efficient relative to the status quo? ____ A _____ 1.d. Which of the above options, if any, is utilitarian-ethical relative to the status quo? ____ A _____
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Next 3 questions ( Majors only ): Assume an otherwise well-functioning competitive market with the following: Demand: P = 1050 – 0.1Q; Private-cost supply: P = 50 + 0.2Q. Production of each unit of output Q above leads to a marginal external cost of $150, which implies social-cost supply: P = 200 + 0.2Q. 2. (8 points) Assuming firms can freely pollute in the absence of regulation, compute the "free market" equilibrium P, Q, and total gross gains from trade (CS + PS) using the private-cost supply equation. Show your work. 1050 - 0.1Q = 50 + 0.2Q ==> Q = 3,333.33; P = 50 + 0.2(3,333.33) = $716.67 Total gross gains from trade = [(1050 - 50)*3,333.33]/2 = $1,666,666.67 Equilibrium P = $ 716.67 , Q = 3,333.33 units, and total gross gains from trade = $ 1,666,666.67 3. (8 points) Compute the dollar amount of total external cost generated when firms can freely pollute in
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2 - Econ 423 Exam#1 Spring 2004 Prof Hackett Your Name_KEY...

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