Final Review - ECO 304K: INTRODUCTION TO MICROECONOMICS...

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1 ECO 304K: INTRODUCTION TO MICROECONOMICS Unique # 33645 Fall 2009 Prof. Wiseman Practice Questions for Final Exam 1. Understand all the material for Midterms 1 and 2. 2. Review the questions and study problems at the end of your textbook chapters. THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Consider the market for a good that generates harmful pollution. In particular, every unit of the good that is produced imposes $3 of pollution damage on society. Participating in this market are 12 consumers, each of whom will buy at most one unit of the good, and 11 suppliers, each of whom will sell at most one unit of the good. The distribution of buyer values (or buyer reservation prices) is as follows: Buyer Value Number of Buyers $ 1 2 $ 3 4 $ 5 3 $ 9 3 The distribution of seller costs (or seller reservation prices) is as follows: Seller Cost Number of Sellers $ 2 2 $ 4 5 $ 6 4 3. Without any intervention in this market, how many units of the good would be produced in a competitive equilibrium? a) 2 b) 3 c) 4 d) 6 e) 9 4. How many units of the good should be produced to obtain the socially efficient outcome? a) 2 b) 3 c) 4 d) 6 e) 9
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2 5. Under these circumstances, what is the deadweight loss associated with the competitive equilibrium? a) $6 b) $8 c) $11 d) $17 e) $22 6. Consider a good that generates a negative externality. Is the quantity produced by a profit-maximizing monopolist greater than, less than, or equal to the efficient quantity? What if the externality is positive? 7. True or False: A tax always reduces total surplus. 8. True or False: Since competitive markets are efficient, there is no role for government in the economy. THE NEXT THREE QUESTIONS DEAL WITH THE FOLLOWING SITUATION: The supply curve in the cookie sculpture market is given by P = 500 + 40Q S . The demand curve is given by P = 2000 – 10Q D . Each cookie sculpture produced generates a positive externality worth $500, because of the wonderful smell. 9. What are the competitive price and quantity? 10. What is the socially optimal quantity? How much larger is total surplus at the optimal quantity than at the competitive outcome? 11. How large a subsidy should the government offer to producers to achieve the efficient quantity? How much will the government spend on the subsidy? 12. A November 11, 2005 article in the New York Times reports that a roughly $14 “congestion charge” to drive into central London has led to a 20% decrease in carbon dioxide emissions and a 12% decrease in emissions of nitrogen oxides. From those figures, which of the following conclusions can be drawn? a) The charge is too high relative to the socially optimal level. b) The charge is too low relative to the socially optimal level.
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Final Review - ECO 304K: INTRODUCTION TO MICROECONOMICS...

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