Econ 423 Quiz 1, Prof. Steven Hackett, Fall 2009. ANSWER KEY (relatively hard quiz; applied a curve)

Please select 2 of the 12 numbered questions below that you LEAST prefer to answer and cross them out with a BIG X through the entire question. Please provide the very best answer to the remaining 10 questions, each of which are worth 10 points.

Please use the information in the table below for the next 3 questions:

Policy Options	Change in Utility Relative to Status Quo for Affected Members of Society				Net Social Utility
	Jake	Nestor	Latoya	Biyu
Option 1	70	-20	150	0	200
Option 2	50	-10	100	30	170
Option 3	30	0	50	60	140
Option 4	10	10	0	90	110

1. Correctly fill in the column labeled “net social utility” for each policy option in the table above.

2. Which policy option(s) above, if any, offer a Pareto improvement over the status quo, as given in the table above? __Options 3 and 4__.

3. Policy option __1__ is Kaldor-Hicks efficient, and could be made Pareto efficient if those made better off by this policy option were to jointly transfer at least _20_ units of utility to __ Nestor _.

4. Which of the following ethical systems is based on the idea that people have a categorical imperative or duty to act in a particular way? Circle one: Deontological ethics Teleological ethics Utilitarianism

Please use the following table for the next 3 questions:

Quantity Supplied	Total Cost, Firm A ($)	Marginal Cost, Firm A ($)
0	200	---
1	250	50
2	350	100
3	500	150
4	700	200
5	950	250
6	1,250	300
7	1,600	350
8	2,000	400
9	2,450	450
10	2,950	500

Note: Recall that MC = ΔTC/ΔQ. In the table above, ΔQ always equals 1. When quantity increases from 0 to 1, note that TC increases from 200 to 250, implying that ΔTC = 50, and ΔTC/ΔQ = 50/1 = 50.

5. Complete the column for marginal cost in the table above.

6. Suppose that there are a total of 100 sellers in this market (including firm A) with the exact same cost structure as firm A above. Please use this information to complete the column for market quantity supplied in the table below:

Price ($)	Market Quantity Supplied	Market Quantity Demanded
10	0	1,200
50	100	1,100
100	200	1,000
150	300	900
200	400	800
250	500	700
300	600	600
350	700	500
400	800	400
450	900	300
500	1000	200

Note: Firms in a competitive market set quantity supplied (QS) using their MC (see previous table). Thus firm A will supply Q = 1 when P = MC = 50; firm A will supply Q = 2 when MC = 100; and so forth. Multiply firm A’s QS by 100 to get market quantity supplied.

7. What is the market equilibrium price and quantity in the table above? P* = __300_ Q* = __600__.

Note: Equilibrium price ($300) occurs where market QS = market QD in table above (QS = QD = 600).

Use the following diagram for the next 3 questions:

8. The “free market” equilibrium price is $_800_, the “free market” equilibrium quantity is _1400_, and the gross gains from trade are $_980,000_ (show your work below).

Note: P and Q found where the “private cost” supply intersects demand in the diagram. The gross gains from trade (sum of consumer and producer surplus) = $(1500 – 100) x 1400/2.

9. The dollar value for total external cost in the “free market” equilibrium is $_280,000_, and thus the true net gains from trade in the “free market” equilibrium are $__700,000__ (show your work below).

Note: Since marginal external cost (MEC) is a constant $200 in the diagram, total external cost = MEC x Q = $200 x 1400 = $280,000. The true net gains from trade = gross gains from trade – total external cost = $980,000 – $280,000 = $700,000.

10. If a Pigouvian tax of $_200_ per unit were imposed, with the proceeds used to remediate pollution and compensate those harmed, then the resulting “socially optimal” equilibrium generates true net gains from trade equal to $_720,000__ (show your work below).

Note: A Pigouvian tax = MEC = $200 (see diagram). Under the socially optimal equilibrium at the intersection of the social-cost supply curve and the demand curve (see diagram), P = $900, Q = 1,200, and the true net gains from trade = (1500 – 300) x 1200/2 = $720,000.

11. The problem with goods and services that generate positive externalities is that otherwise well-functioning competitive markets provide an equilibrium quantity that is too [circle one: Large Small]. A conservation easement can [circle one: Internalize Externalize] the positive externality.

12. [circle one: True or False]: Under common law principles prior to the advent of environmental laws in the US, those harmed by pollution were highly successful in limiting pollution that damaged “unowned” resources such as the air and water. Therefore environmental laws in the US were unnecessary for effectively limiting pollution.