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Unformatted text preview: d) The mayor also considers issuing pollution permits and establishing a market for these permits. For reasons associated with the relative generosity of the firms to his recent election campaign, firm A is given permits such that is must engage in 100 units of pollution abatement if it fails to enter the market. Firm B is given permits such that it must engage in 60 units of pollution abatement if it fails to enter the market. Each unit allows the firm holding the unit to produce one unit of pollution. Assume that the market for pollution rights is perfectly competitive. To derive the demand for pollution rights of firm A solve the following cost minimization problem: min a A (100 a A ) 3 + p a A (6) Solve the following problem for firm B to derive the demand for permits of firm B: min a B (60 a B ) 2 + p a B (7) A market equilibrium is achieved when a A = a B . Compute the market equilibrium. e) Is the market equilibrium socially optimal? Explain. Problem 5: BlackWhite Achievement Gap a) Suppose you are measuring the blackwhite achievement gap by regressing a stan dardized test score T i on student characteristics X i and a race dummy variable, D i . T i = βX i + αD i + u i (8) where u i is the error term in the regression. a) Explain how the coefficient α is often used as a measure of the blackwhite achieve ment gap. b) What variables are likely to influence test scores and should be included in the vector X i ? c) Provide an example of a variable that is likely to have an impact on test scores, but is very difficult to measure? d) How does the existence of variables discussed in (c) affect the interpretation of the least squares estimate of α ? Problem 6: Police Effectiveness Suppose you analyze the impact of policing on crime. You want to test the hypoth esis that hiring additional police officers reduces the crime rate. You have collected data on criminal arrests in a city, the number of policy officers as well as a number of socioeconomic city characteristics that are related to crime such as poverty and unemployment for a large, random sample of cities. You estimate a linear regression model using least squares. You find that the coefficient that measures the impact of policing on crime is positive and statistically significant from zero. Provide an expla nation for this empirical result that is not based on the notion that police officers are criminals....
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 Fall '12
 Sieg
 Equilibrium, Regression Analysis, Fiscal Policy, Public Good, Standardized test, Earned Income Tax Credit, pollution abatement

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