Unformatted text preview: Elem Microeconomics Final Exam May 17, 2011 1. 1
Σ $ Long Run AC D X a.  For the above graph, where is the long-‐run marginal cost curve? Explain. b.  Which of the following applies to the technology of the industry depicted above? If more than one applies, or can apply, specify: • Decreasing returns to scale • Constant returns to scale • Increasing returns to scale • The law of diminishing returns Explain. c.  If the above industry is perfectly competitive, what are the long-‐run equilibrium price and quantity? Explain. d.  If the industry is a monopoly, what are the long-‐run equilibrium price and quantity? Explain. e.  If the industry is a monopoly, is the outcome efficient? Explain. f.  Why is perfect competition inconsistent with increasing returns to scale? 2. a.  You are promised a $100 payment one year from today. (There will be no inflation between today and a year from today.) What is the present value of this promise? Explain why it makes sense. b.  We argued in class that the demand curve for investment projects slopes downward. Explain why this is true. c.  Find one point on a consumer’s supply curve for saving. Explain what you have done. d. If the interest rate rises, will saving rise or fall? Explain. e.  Resources can be used to produce either consumption goods or investment goods. For the model we developed for determining the amount of investment that occurs, is the allocation of resources between the production of consumption and investment goods efficient? 3 a.  Show how to find one point on a consumer’s supply curve of labor. Explain. b.  A consumer has daily unearned income of $100 and an hourly wage of $10. His life is now going to change in one of the following two ways: Scenario 1: He joins a Union 1, pays $50 in Union Dues, and gets a wage increase to $20/hour. Scenario 2: He joins Union 2, which charges no Union Dues but also gets him a wage increase to $20/hour. Do you predict that he will work more under Scenario 1 or Scenario 2? Explain. c.  Starting with whatever tools you need, show how to derive one point on a firm’s demand curve for labor. d.  Consumers care about two goods; consumption and leisure. The economy is capable of producing consumption goods by sacrificing consumers’ leisure time (i.e., by having them go to work). In the model we developed in class, is the amount of consumption that is produced efficient? Explain. 4. a.  Using the tools of supply and demand, show how the imposition of a tax influences the market for the taxed good. Be sure to explain what you have done, and show the effect of the tax on quantity and price, and the tax revenue. b.  We argued in class that a sales tax on one good leads to economic inefficiency. Explain this finding. c.  Redo your answer to part (a) above, assuming the supply curve for the good is perfectly vertical. d. Does the inefficiency (part b above) get worse or better if the taxed good has a vertical supply curve? Explain. 5. Suppose the scientists agree that it is important to limit world CO2 emissions to 1 million tons per year. Current emissions are 3 million tons. You are assigned the task of achieving the 1-‐
million-‐ton target, and you wish to do so in the cheapest possible way. You consider the following methods of achieving your objective: i. Levy a tax of $50/ton on CO2 emissions. ii. Each polluter is issued permits authorizing it to 1/3 of the amount of CO2 that it was emitting before the permits. Polluters are permitted to sell unused permits. a.  Thoroughly examine method (i), the tax. • Is it a good method for hitting the specific target of 1 million tons of effluent? • Whatever target it hits, will it do so in the cheapest possible way? BE SURE TO EXPLAIN YOUR ANSWER TO BOTH OF THESE. b.  Now examine method (ii) on the same criteria (is it a good method for hitting the target, and will it do so In the cheapest possible way)? c.  Now suppose some engineer discovers a way of reducing the cost of CO2 removal by 80%. And as a result the scientists say, “Well, if it’s that cheap, we should reduce emissions even more.” Which of the two abatement schemes (tax and permits) will be more effective at reducing pollution in response to this technical advance? Explain. 6. The government is contemplating three methods for improving the food consumption of poor people: • Cash grants • Distribution of free food • Food stamps. (Food stamps work as follows: eligible people pay $1 for a $2 food stamp – they can buy as many as they want. They use the food stamps to buy food at the grocery store. The store owners turn in the food stamps to the government, which pays them $2 for every $2 food stamp.) a.  Your job is to choose among these three programs. In particular, you are looking for the program that increases the participant’s food consumption the most per dollar of government cost. Which program do you choose, and why? b. Again assuming the government will spend the same amount on each program, which program would a participant (an eligible poor person) prefer? Explain. c. One major concern with the food stamp program is fraud. Explain why a program such as food stamps creates a danger of fraud. d.  If consumers engage in the food-‐stamp fraud discussed in part ( c) above, does this fraud increase or decrease economic efficiency? Explain. 7. The price of gasoline has recently risen from about $3 per gallon to approximately $4 per gallon. a.  Using supply and demand analysis, explain what you think might have caused this spike. b. Since the high gas price has imposed a severe burden on voters, some members of Congress have proposed that the price of gasoline be frozen at $3/gallon. In order to prevent the long lines at gas stations that would likely result from the price cap, the congressmen propose issuing just enough ration coupons to equal the amount of gasoline that’s produced. i.  Assuming these ration coupons cannot be bought or sold, draw the budget constraint for a consumer after the ration coupons are issued. ii.  Is the allocation of gasoline among consumers likely to be efficient under this system? Explain. c. Now assume that it is permitted to sell the ration coupons. i.  Draw and explain a typical consumer’s budget constraint. ii. Is the allocation of gasoline among users efficient now? Explain. d. Using any relevant information in question 7, approximately what do you think the price of ration coupons will be? Explain. ...
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- Summer '11
- Microeconomics, food stamps, good method