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Econ 401 W08 MT2 v4

# Econ 401 W08 MT2 v4 - Name Midterm II Economics 401 Assume...

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March 13, 2008 Name___________________________ Midterm II Economics 401 Assume throughout the exam that preferences are strictly monotonic and strictly convex and that indifference curves are not kinked UNLESS the question tells you otherwise. The number in brackets [] before the text of each question refers to its point value. There are 25 questions worth 4 points each, 15 questions worth 6 points each, and 10 questions worth 11 points each. 1. [6] The next two questions refer to the figure below, which shows the market for security guards at a shopping mall. Security guards are a public good for the two stores at the mall: guards hired by one store also provide services for the other store. The two stores have individual, private demand curves for guards, given by D 1 and D 2 . Social demand is the bold, kinked curve, labeled D. If the two stores hire guards separately, how many guards will be hired in the competitive, private equilibrium? D D 2 D 1 4 5 7 9 3 2 8 7 18 10 25 Guards per hour Price of guard service, \$ per hour Supply, MC 13 A. 4 B. 0 C. 5 D. 7 Page 1, v4

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2. [11] Refer again to the figure from the previous question, which shows the market for security guards at a shopping mall. Security guards are a public good for the two stores at the mall: guards hired by one store also provide services for the other store. Now suppose the mall's owner will provide an \$s-per-hour-per-guard-subsidy. What is the optimal s that leads to the socially optimal outcome for the two stores? 3. [4] The following two questions refer to the diagram below. Bret and Jemaine are the two consumers in a two-good exchange economy. The edgeworth box drawn below shows the contract curve, their intial endowments e, and their indifference curves (U B and U J , respectively) through the endowment. Of the points illustrated, the set of all Pareto efficient points is e A C B Bret Jemaine Contract Curve U B U J 4. [6] Refer again to the figure from the previous question. Recall that Bret and Jemaine have an endowment at point e. Of the contracts A, B, and C, which contracts would both of them accept? Page 2, v4
5. [4] The following information is for the next four questions. Yusuf and Nesli are the two consumers in an economy with goods 1 and 2. Yusuf has an endowment (9,1) and Nesli has an endowment (1,9), where the first number is the endowment of good 1 and the second number the endowment of good 2. They both have the same utility function U=q 1 q 2 . As a result, the equation of the contract curve is q Y2 =q Y1 , where q Y1 and q Y2 represent Yusuf's consumption of good 1 and good 2, respectively. In the dictator mechanism where Yusuf can assign any feasible allocation, the following must be TRUE: A. There are allocations that make Nesli worse off relative to the allocation that Yusuf assigns B. Yusuf will assign an allocation that can be achieved via the market mechanism with appropriate endowment transfers C. Yusuf will not assign a Pareto efficient allocation D. All of the above

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Econ 401 W08 MT2 v4 - Name Midterm II Economics 401 Assume...

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