AEB 2014 – Economic Issues, Food, and You
Exam # 2; Thursday, October 26th, 2006
Please write down your name and UF ID here è
This Exam consists in 12 questions plus 1 bonus question. Total points are 15 from questions 1-12. You can get up to 2 extra points if you answer the last question. Your grade will be evaluated over a total of 15 (# points/15), but you can get up to 17 points.
1. Refer to Figure (1 Point). Which of the four graphs represents the market for peanut butter after a major hurricane hits the peanut-growing south?
a. A
b. B
c. C
d. D
2. Refer to Figure(1 Point). Which of the four graphs represents the market for winter coats as we progress from winter to spring?
a. A
b. B
c. C
d. D
3. Refer to Figure (1 Point). Which of the four graphs represents the market for pizza delivery in a college town as we go from summer to the beginning of the fall semester?
a. A
b. B
c. C
d. D
4. Refer to Figure (1 Point). Which of the four graphs represents the market for cars as a result of the adoption of new technology on assembly lines?
a. A
b. B
c. C
d. D
5. Using the midpoint method, compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic? (1 Point)
6. When the Shaffers had a monthly income of $6,000, they usually ate out 10 times a month. Now that the couple makes $4,500 a month, they eat out only 8 times a month. Compute the couple's income elasticity of demand using the midpoint method. (1 Point)
7. Refer to Figure (1 Point). If the government imposes a price ceiling of $12 in this market, the result would be
a. a surplus of 10.
b. a surplus of 20.
c. a shortage of 20.
d. neither a surplus nor a shortage.
8. Refer to Figure (2 Points). At the equilibrium price, producer surplus is
a. $480.
b. $640.
c. $1,120.
d. $1,280.
9. Refer to Figure (2 Points). If the price decreases from $22 to $16, consumer surplus increases by
a. $120.
b. $360.
c. $480.
d. $600.
10. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that (1 Point)
a. Dick pays Jane $600 for her inconvenience.
b. Jane pays Dick $650 to give the dog to his parents who live on an isolated farm.
c. Jane pays Dick $800 to give the dog to his parents who live on an isolated farm.
d. There is no private transaction that would improve this situation.
11. Refer to Figure (1 Point). This graph represents the tobacco industry. The socially optimal price and quantity are
a. $10.00 and 25 units, respectively.
b. $3.00 and 25 units, respectively.
c. $7.50 and 50 units, respectively.
d. Neither one. With externalities, we never have a social optimal.
12. Refer to Figure (2 Points). Suppose that the production of soccer balls creates a social cost which is depicted in the graph above. If the government wanted to force the firm to internalize the cost of the externality, what action should it take?
a. Impose a tax of $7.50 per soccer ball.
b. Impose a tax of $7 per soccer ball.
c. Offer a subsidy of $3 per soccer ball.
d. Offer a subsidy of $2.50 per soccer ball.
BONUS POINT (1 OR 2 POINTS) !!
Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 10 pollution permits. What is the Social Net Benefit of introducing a market to trade pollution permits? Assume that the price of the permit in the market is the average cost for both firms.
a. $500
b. $1,000
c. $1,500
d. $2,000
· Point out the right Answer (a, b, d or d) to gain 1 extra point
· Point out the right answer PLUS Complete all the exercise, that is, give: a) total cost FOR EACH FIRM before market is introduced, b) total cost FOR EACH FIRM after market is introduced, c) what firms sells and what firm buys permits, AND d) how many permits will the firms trade to gain 2 extra points
ANSWERS:
# 1 / D
# 2 / B
# 3 / A
# 4 / C
# 5 / 0.75, Inelastic
# 6 / 0.78
# 7 / D
# 8 / B
# 9 / B
# 10 / D
# 11 / A
# 12 / B
# 13 (extra) / A
Question # 5: All you have to do here is apply one formula:
Negative, as expected. Furthermore, is less than unity, therefore Inelastic.
Question # 7: Here, the key is realize that a Price Ceiling is a LEGAL MAXIMUM, the price may be any price UP TO THE MAXIMUM, 12 in this case. As the current equilibrium price is 10, market doesn’t reach the ceiling, so nothing happens. Answer is D
Question # 9: Here you need to calculate two areas: the rectangle with an area (BASE*HEIGHT) equal to: (Height: 22-16=6, in the price axis) times (Base: 0 to 40=40, in the quantity axis)= 240
PLUS, the triangle Base (80 – 40=40, in the quantity axis) times (Height: 22-16=6, en the price axis) times (one half) = 360, Therefore, answer is B
Question # 10. Applying our criteria, Dick’s benefit is bigger than Jane’s cost (700>500). As net benefit of Right is positive, right should prevail. Dick’s Right prevails, dog stays. But Dick doesn’t have to compensate nobody, since he’s the right’s owner.
A private transaction will imply that somebody can buy your right. Jane is not willing to pay more than 500, therefore no private transaction will occur. Dick keeps the dog, and as he has the right to do that to begin with, he doesn’t have to compensate nothing to Jane. Answer is D.
No trade allowed / After Markets
Trade Allowed
Firm A / Firm B / Firm A / Firm B
Pollutes / 20 / 20 / 20 / 20
Cost / 100 / 50 / 100 / 50
Permits / Permits
Uses 10 / Uses 10 / Buys 10 / Sells 10
Own / 10 / 10 / 10 / 10
Buy/Sell / 0 / 0 / 10 / -10
Cleans / 10 / 10 / 0 / 20
Total Pollution Produced / 20 / 20 / 20 / 20
- Pollution Cleaned / 10 / 10 / 0 / -20
Net Pollution
Per firm / 10 / 10 / 20 / 0
Net Pollution
In the Economy / 20 / 20
Individual Cost / 1000 / 500 / 750 / 250
Total Cost / 1500 / 1000
+ / -
Net Benefit / 500
So before, total pollution was 40. After the government intervention, total pollution is 20, a 50% decrease. You can achieve this using the market at a price of $1,000, or without it at a price of $1,500. So the net benefit of introducing the market is ($1,500-$1,000)= $500.
Question # 12: A negative externality is always corrected with a Tax (decrease supply in this case). A positive Externality is corrected with a subsidy, to increase the demand.
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