Econ 100B (Grossman)—Winter 2010 Answers (but not detailed solutions) to Spring 09 ﬁnal exam free-response 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) Right-to-noise. 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 right-to-quiet, Myra chooses T and how much to pay, and, given her indiﬀerence, we cannot really predict what she’ll choose. However, under right-to-noise, Kathleen chooses how much quiet to buy and she strictly prefers T = 4. 2. Oligopoly question
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