Midterm 05 Solution - ECON/FRE 374 Midterm Midterm, October...

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1 ECON/FRE 374 – Midterm Midterm, October 28, 2005 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) a. Define and illustrate the concept of static social efficiency. What conditions are needed for the market outcome to be the same as the socially efficient outcome?(15 points) In a statically socially efficient outcome output is chosen to maximize current net benefits to society. Net Benefits to Society comprise of Total Social Benefits-Total Social Costs. The condition necessary for achieving Static Social Efficiency is Marginal Social Benefit=Marginal Social Cost. Illustration: Output q* maximizes net social benefits, and the maximum net social benefits are a+b. Costs and Benefits Quantity of Output MSC b c d q * q MSB a
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2 b. Define Sustainable Development. What does sustainable development imply for the growth of social welfare? (8 points) We use the World Commission on Environment and Development’s definition of sustainable development. Sustainable development is “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Sustainable development implies that current consumption and development should not make the future generations any worse off than we currently are. Thus sustainable development implies a non-diminution of social welfare in the future. In other words, the growth of social welfare should be greater than or at least equal to zero.
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Midterm 05 Solution - ECON/FRE 374 Midterm Midterm, October...

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