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Unformatted text preview: PADP 8670 Fertig Fall 2011 UGA Midterm Exam Practice Problems 1. I told my pediatrician's office staff that our insurance would not cover my child's vaccinations at this visit because we had hit the limit on our wellness care benefit for the year. She told me that she would charge a lower price for the vaccinations than if insurance had covered it. a. What do economists call this practice? b. Using a graph (and words), describe the effects of this practice on the pediatrician's profits and on my consumer surplus. Assume that my pediatrician is a monopolist with a horizontal MC curve and that I would not have gotten the vaccinations for my child if the price was the "insurance" price. 1 2. Assume that the city council wanted to remove a few speed bumps in the downtown area because they slowed traffic considerably exacerbating congestion. By removing them, commute times would be shorter. However, the cost is that the higher speeds increase the probability of a fatal accident. The trade-off is that we gain 75,000 hours per life lost. If the average wage is $18.48, what does this trade-off imply about the value of statistical life? 2 3. Consider the market for housing. To stimulate the economy in light of the current housing crisis and the economic downturn, consider 2 policies. (1) Provide all consumers with a $2000 voucher that can be used to pay their mortgage or their rent, or (2) Lower income taxes by an average of $2000 per year. (HINT: A budget line and indifference curve might help.) Which policy will have a larger effect on the non-housing sector of the economy? Why? 3 4. Consider a monopoly with the following demand curve: P = 40 - 4Q (Note that this implies the MR = 40 - 8Q). Assume the firm's MC = 8 and ATC = 8. a. Graph the demand and marginal revenue curves as well as the marginal cost curve on the axes below. Indicate the profit-maximizing price and quantity. Calculate exact numbers also. b. How much deadweight loss occurs? (indicate on the graph only) c. What would be the perfectly competitive price and quantity, deadweight loss, and long-run profit? (calculate numbers) 4 d. We often regulate monopolies; in this case, consider regulating the monopoly by allowing the monopolist to charge no more than $12. i. In this case, is there deadweight loss? (indicate on the graph) ii. Does the monopolist earn a profit? If so, how much? e. Next, we discover that the monopolist's production process creates hazardous pollution; it costs $4 per unit produced to clean up the pollution. In this case, what is the socially optimal price? Briefly describe a policy that would produce the socially optimal outcome. 5 5. To raise
revenue, we decide to tax one of two goods; in each case, the price of the good is $3 and the quantity sold is 2,000. The market demand and supply curves for the goods are shown below (the supply curves are identical). Circle the best answer for parts a, b, and c below; answer part d. P P S S $3 D D 2,000 Q 2,000 Q Good A Good B a. Which tax will raise more revenue? Good A Good B No difference b. Which tax will create more deadweight loss? Good A Good B No difference c. Which tax will consumers pay more of? Good A Good B No difference d. Now assume that the production of both goods results in external social costs associated with pollution such that the optimal level of production in both industries is 1000 units. Can the government impose a single tax rate (t) on both goods to achieve the optimal level of production? Explain your reasoning. 6 6. Explain why public goods are not usually produced privately, and when they are, they are produced at a lower level than the socially optimal amount. In your answer, clearly define a public good and the socially optimal amount of the public good. 7 7. Consider the market for solar power. Assume the market is perfectly competitive and initially in long-run equilibrium; solar power sells for $.25 per kwh (kilowatt hour, a unit of power). a. Draw graphs to represent the market as well as a single firm. Market Firm a. Next, to encourage conservation, Congress taxes all forms of energy EXCEPT solar power. Show what happens to the market and the firm in the short run; indicate clearly what happens to price, quantity, and profit. b. What happens to the market and the firm in the long run? Indicate clearly what happens to price, quantity, and profit. 8 8. Federal Deposit Insurance (FDI) provides up to $100,000 in insurance coverage to depositor's losses in the event that a bank becomes bankrupt. a. Explain how this type of insurance affects people's willingness to save. b. What type of market failure was FDI designed to alleviate. c. Discuss what types of unintended consequences are likely to result from this policy. 9 ...
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- Fall '10