Econ131_PS1_S2010

Econ131_PS1_S2010 - Econ 131 - Spring 2010 Professor:...

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Econ 131 - Spring 2010 Professor: Emmanuel Saez GSI’s: Fran¸cois Gerard, Mark Borgschulte Problem Set 1 Due Monday February 22nd in class. Late problem sets will not be accepted. Points are divided equally between the 4 parts. Please staple all pages of the problem set. Short Answers: Show your work to receive partial credit. Please be succinct (less than 3 sentences). A) Discuss two reasons that government should intervene in the operation of free markets and give two examples of real-world government policies or programs motivated by these reasons. B) In plain everyday English, explain the difference between marginal cost and average cost. C) True/False/Uncertain (no points without an explanation): In the presence of 100% crowd-out the government is powerless to correct the under-provision of public goods. D) True/False/Uncertain (no points without an explanation): Since the Second Welfare Theorem tells us that the government can choose any Pareto efficient point in the Edgeworth box, there is no need to sacrifice efficiency for equity. 1
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Problems 1.) California College is planning to open a new dorm with capacity r . The college’s total cost function for this endeavor is: C college = 50000 + 2 . 5 r 2 The demand for the dorm rooms is given by: P = 12000 - 10 r However, the extra dorm rooms increases the number of people living in a confined area which annoys the non college student neighbors. The cost to the neighbors is given by: C neighbors = 7 . 5 r 2 a) Depict this situation graphically. Clearly label the market equillibrium and the social equilib- rium. Pretend you are talking to someone who has never taken an economics course; explain why the market and social equillibria differ in this market. b)
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Econ131_PS1_S2010 - Econ 131 - Spring 2010 Professor:...

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