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Unformatted text preview: Department of Economics University of California, Berkeley Econ 100A GSI: Antonio Rosato Final Review Section The majority of these problems come from an old 100A final given in Fall 2008. 1. T/F: When the government has limited information about the costs and benefits of pollution abatement, a standard will be preferable to a fee when the marginal external cost curve is steep and the marginal abatement cost curve is relatively flat. T - if we look at Figure 18.7, we see that a 12.5 percent error in setting the standard leads to extra social costs of triangle ADE. The same percentage error in setting a fee would result in excess costs of ABC. The choice between an emissions fee and an emissions standard depends on the marginal cost and marginal benefit of reducing pollution. First, suppose small changes in abatement yield large benefits while adding little to cost. In this case, if an emissions fee is set too low because of uncertainty, the firm will produce far too many emissions, so a standard is better. However, if small changes in abatement yield little benefit while adding greatly to cost, the cost of reducing emissions is high. In this case, fees should be used because setting a standard too high (due to uncertainty) yields little benefit but increases costs way beyond the efficient level. A system of transferable emissions permits combines the features of fees and standards to reduce pollution. Under this system, a standard is set and fees are used to transfer permits to firms that value them the most (i.e., firms with high abatement costs). However, because of uncertainty, the total number of permits can be incorrectly chosen. Too few permits will reduce emissions to inefficiently low levels and create excess demand for the permits, increasing their prices and inefficiently diverting resources to owners of the permits. 2. [From Hal Varians Intermediate Microeconomics ] Take the following payoff matrix of a si- multaneous game: Player B Left Right Player A Top 1,9 1,9 Bottom 0,0 2,1 (a) Find the Nash equilibria (if there are any). (b) Now, assume the structure of the game changes to be sequential (with Player A moving first). Draw the extensive form of this game and find each players optimal decision and the resulting outcome. 3. On your first day of work at Stork Consulting you are greeted by a jolly veteran consultant named Red Dunkle. He tells you that he needs you to do a back of the envelope calculation. (a) A firm in Pittsburg is producing copper toys with a production function of q = 5 KL . Since the 80s the firm has used only 5 machines. The price of each machine is $1, 000. The owner was told that his marginal costs of production are $2. Given that informa- tion can you determine the price of labor? If so, calculate it....
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