Eco100CarrT3SolutionsWinter2011

Eco100CarrT3SolutionsWinter2011 - Solutions to Eco100 Carr...

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Solutions to Eco100 Carr Test 3 (2006-7)
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Solutions to ECO100 (Carr) Test 3, March 2007 1. A Both actions limit the number of workers available for firms to hire; hence the supply of labour will decrease. Note that choice D is also possible as a longer apprenticeship might increase the productivity of workers. However the decrease in the supply is certain so A is the correct answer. 2. C Higher salaries are due to the high demand and low supply of sport stars, not externalities. 3. C Only choice C refers to a cost that is borne by an external party (i.e. not the buyer or the seller of the dogs). 4. E A positive externality creates a situation where the marginal social benefit is higher than the marginal private benefit to consumers, leading to underproduction. A subsidy by the government will lead to a rightward shift in the supply and could increase the production to the efficient level. 5. B This is a classic example of the “tragedy of commons”. Because fisheries are non- excludable but rival goods the fishermen ignore the negative externalities they create and make their fishing decisions based on their private MC, which is less than the marginal social cost. 6. C Public goods are non-rival and non-exclusive. Choice C refers to the second of these properties. 7. C Rent seeking refers to a behaviour whereby private firms and individuals try to use the powers of the government to enhance their own economic well- being in ways that are not in the social interest. 8. E When a firm bears the entire social cost of production it is said to have “internalized” the externality. 9. A The Socially optimal level of pollution abatement is where MC=MB for the last unit of pollution abated. Any abatement level that is less or more will lead to lower net social benefits. 10. A The Socially optimal level of pollution abatement is where MC=MB for the last unit of pollution abated. Because MB of abatement is decreasing and MC is increasing, complete elimination of pollution is not socially desirable because at 100% abatement MB is zero whereas the MC is positive. 11. D A negative externality always leads to a higher marginal social cost than marginal private cost at all levels of output. 12. D The contributions of car production to nominal GDP in each year are $40b.
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13. A This follows the definition of the value added approach of national accounting. 14. C The final good in this example is the sale of shoes to customers, which has a value of $1,200. One can also come up with the same number by adding up the value-added by each producer: $400 for the rancher + $300 for the tanner + $500 for the shoemaker = $1,200. 15. E Gross investment (I) includes spending on equipment and machinery, changes in inventories, new residential and industrial buildings and depreciation. 16. A
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This note was uploaded on 04/12/2011 for the course ECONMICS 100 taught by Professor Carr during the Spring '11 term at University of Toronto- Toronto.

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Eco100CarrT3SolutionsWinter2011 - Solutions to Eco100 Carr...

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