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Econ 100B (Grossman)—Winter 2010
Answers (but not detailed solutions) to Spring 09 ﬁnal exam
freeresponse questions
1. Externality question
(a)
F
m
=
F
k
= 4,
T
= 8
(b)
U
m
= 12,
U
k
=

4,
U
=
U
m
+
U
k
= 8
(c)
F
m
=
F
k
= 4,
T
= 4;
U
m
= 8,
U
k
= 2,
U
= 10
(d) Optimal tax is $1 per hour
(e)
U
m
= 4 + 2 = 6,
U
k
= 4 + 2

2 = 4,
U
= 10
(f)
p
T
= 1
(g)
U
m
= 4,
U
k
= 8

2 = 6,
U
= 10
(h)
p
T
= 1
(i)
T
= 4
U
m
= 8 + 4 = 12,
U
k
= 0

2 =

2,
U
= 10
(j) Righttonoise. The optimal tax rate or price that perfectly internalizes the externality happens
to be equal to the price of fruit. Because Myra views fruit and music as perfect substitutes,
she is indiﬀerent between all combinations of fruit and music (that cost $4). Under the tax or
righttoquiet, Myra chooses
T
and how much to pay, and, given her indiﬀerence, we cannot really
predict what she’ll choose. However, under righttonoise, Kathleen chooses how much quiet to
buy and she strictly prefers
T
= 4.
2. Oligopoly question
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 Spring '08
 KILENTHONG

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