Sample Midterm 1 Answer Key - Economics 148 Sample midterm...

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Economics 148 Sample midterm solutions Directions: You have 75 minutes to complete the exam. Please place your final answer in the space provided below. Partial credit will be given for work that is both carefully done and legible. Good luck! Problem A (20 points) – Welfare Economics Consider a pure exchange economy with two individuals (1 and 2), each of whom consumes food and drinks. U 1 D U 2 food U 2 A B C U 1 drinks Individual 1 Individual 2 Indifference curves for individual 1 are labeled U 1 and U 1 , while the indifference curves for individual 2 are labeled U 2 and U 2 .

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For each of the following statements, circle TRUE or FALSE: 1) Allocation C is Pareto Efficient: TRUE or FALSE 2) Allocation A is Pareto Efficient: TRUE or FALSE 3) Allocation B is Pareto Efficient TRUE or FALSE 4) Allocation B is a Pareto improvement over (or relative to) allocation C TRUE or FALSE 5) Allocation C is a Pareto improvement over (or relative to) allocation B TRUE or FALSE 6) Allocation D is a Pareto improvement over (or relative to) allocation B TRUE or FALSE 7) At allocation C, 2 2 1 1 food drinks food drinks MU MU MU MU < , where represents the marginal utility to individual 1 from consuming drinks and similarly for the other expressions. 1 drinks MU TRUE or FALSE 8) At allocation D, 2 2 1 1 food drinks food drinks MU MU MU MU < , where represents the marginal utility to individual 1 from consuming drinks and similarly for the other expressions. 1 drinks MU TRUE or FALSE
Problem B (30 points) – Externalities Brent and Gabe are neighbors. Gabe is a beekeeper. The marginal benefit to Gabe from beekeeping equals 10-3B, where B is the number of bees. The marginal cost of an bee equals 4 (i.e. a constant marginal cost). Brent is an apple farmer and, due to pollination of his trees by the bees, his profits are increasing in the number of bees. The marginal external benefit to Brent equals B. 1) In the absence of government intervention or bargaining, how many bees will Gabe

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Sample Midterm 1 Answer Key - Economics 148 Sample midterm...

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