Quiz 1, Econ 423, Fall 2006, Prof. Hackett      Name: Answer Key

 

Each question below is worth 7.5 points, and there are 100 points total. Please provide the best answer to each:

 

I. Definitions:

 

1. Economics: (chapter 1). The study of how scarce resources, goods, and services are allocated among competing uses.

 

2. Scarcity: (chapter 1). The condition of not having enough of something to provide for all that is wanted. The condition of scarcity implies that not all goals can be attained at the same time.

 

3. Opportunity cost: (chapters 1 and 7). When a scarce resource, good, or service is allocated to one use, the opportunity cost of that allocation represents the net value of the best alternative that was forgone.

 

4. Deontological ethics: (chapter 2). Theories of action based on duty or moral obligation. Actions are judged by their intrinsic rightness and not by the extent to which they further one’s own goals or aspirations.

 

5. Consumer surplus: (chapter 3). The gain from trade that goes to consumers when the maximum amount they are willing to pay for something exceeds the price that they have to pay. Geometrically it is the area between the demand curve and the price line in a supply/demand diagram. The experience of finding a bargain at a garage sale is an example of consumer surplus.

 

II. Utilitarianism: Suppose that the State of California is considering four different forestry management options (in addition to the status quo) for Jackson State Forest in Mendocino County. To keep the problem tractable, assume there are only five members of society that are affected by the management decision. The table below shows the level of utility or disutility these five people experience for each of the proposed management options relative to the status quo.

 

Policy Options

Utility by Option for Affected Members of Society

Net Social Utility

Japhy

Yuri

Tristessa

Roland

Elly

Option 1

80

-20

-10

40

120

210

Option 2

50

0

20

-20

170

220

Option 3

0

5

15

30

60

 110

Option 4

-20

60

0

-10

200

 230

 

6. Compute the net social utility for each option and report it in the table above.

7. Based on the Pareto criterion, which of the above is best?  ___3___

8. Based on the Kaldor-Hicks criterion, which of the above is best? ___4___

 

 

III. Supply and Demand

 

9. Carefully draw a fully-labeled supply and demand diagram. Use a straight-edge or ruler. Show equilibrium price and quantity, as well as consumer and producer surplus.

 

 

See figure 3.4 in the textbook

 

 

10-12. Suppose that the equation for demand is given by P = 1000 – 0.5Q, and the equation for supply is given by the equation P = 100 + Q. Derive the numerical values below, and show your work:

 

1000 – 0.5Q = 100 + Q è 1.5Q = 900 è Q = 600 è P = 100 + 600 = 700 = 1000 - 300

 

CS = (1000-700)*600/2 = 90,000;     PS = (700-100)*600/2 = 180,000

 

10. Equilibrium quantity = ____600_____ units.

 

 

11. Equilibrium price = $____700______

 

 

12. Consumer surplus = $____90,000______

 

 

13. Producer surplus = $_____180,000______