Midterm 04 Solution

Midterm 04 Solution - ECON/FRE 374 Midterm Answers Midterm...

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1 ECON/FRE 374 – Midterm Answers Midterm, October 20, 2004 Total Points: 100 Student Name:______________________________ Student Number____________________ Instructions: 1) Write your name, and student number on the exam, and on the answer booklet. 2) Keep a picture ID out on your desk. Someone will verify your identity. 3) Please write all answers on your answer booklets. 4) You have 50 minutes to complete your exam so budget your time accordingly. 5) Hand in both this exam and answer sheet together at the end of the exam. Questions (points in brackets): 1. Essay Question (please be brief) No solution provided for the essay question. 2. The government wants to introduce a policy which reduces the amount of Sulphur Dioxide (SO2) emissions in the air. SO2 is a key air pollutant, generated primarily by coal burning power plants. It is blamed for causing acid rain, a phenomenon which has many harmful impacts on plant and animal life. Your help as a well-trained economist is required. Assume that Total Social Costs ( TSC ) and Total Social Benefits ( TSB ) are measured in hundreds of thousands of dollars, and e is the reduction of emissions in thousands of tons per year. You are given the following TSC and the TSB curves: TSC = 3 e +( e 2 )/2 , TSB = 9 e - e 2 . (35 points) a. Write the equation for Marginal Social Benefits and Marginal Social Costs. Plot both curves on a graph, and label all axes, and intercepts. MSC = 3+e (2.5 points) MSB = 9-2e (2.5 points)
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2 0, 9 1, 7 2, 5 3, 3 4, 1 5, -1 0, 3 1, 4 3, 6 4, 7 5, 8 -2 0 2 4 6 8 10 0123456 SO2 Reduction Benefits and Costs MSB MSC Graph (10 points) b. As an economist, explain, or define what you mean by a “socially efficient” level of SO2 reductions? What is the efficient level of emissions reductions that you would recommend?
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Midterm 04 Solution - ECON/FRE 374 Midterm Answers Midterm...

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