Economics 4220 Problem Set 1 Solution
Click Link Below To Buy: http://hwaid.com/shop/economics-4220-problem-set-1-solution/ Instructions: This problem set consists of two parts. The first part is comprised of 10 multiple choice questions that will be worth 2 points each. The second part is comprised of four short answer questions. You are to answer all four of the questions. Each question will be worth up to five points.

Part I: Multiple Choice – You are to answer all ten of the following multiple choice questions. Each question is worth two points.

Question #1: Flu vaccines provide both private benefits to individuals and positive external benefits to other members of society. Without government intervention, we would expect:

A)

Question #2: Steve purchase pizza which costs $3 a slice and Diet Coke which costs $0.75 a can. At his current consumption level, the marginal rate of substitution between pizza and Diet Coke is 6. Given this information, we know that Steve is:

a)

Question #3: Many economists have documented a strong correlation between income and environmental quality across countries – as nations (individuals) become wealthier, they are willing to spend more to protect the environment. Based on this information, environmental quality is a:

a) Normal good
b) Inferior good
c) A private good

Use the following figure to answer Questions #4 and #5

Figure: Marginal Private Benefits and Marginal Social Benefits

Question #4: Without government intervention, this market will produce __________ units at a price of _____________

A)

Question #5: If the government were to intervene in this market and encourage individuals to fully internalize the external benefits of consumption, what would be the resulting equilibrium quantity and price in this market?

Use the table below to answer questions #6 and #7

Dave and Art live in a new housing development and would like to have streetlights installed to illuminate the streets and sidewalks at night. The table shows Dave and Art’s individual marginal benefits for different quantities of streetlights that could be installed in the neighborhood. Suppose that the marginal cost of installing a streetlight is $6.
Question #6: If Dave had to pay for streetlights on his own, how many streetlights would there be?
a)

Question #7: What is the socially optimal number of streetlights that should be installed in the neighborhood?

a)

Use graph below to answer questions #8 through #10.

Question #8: If this market were left unregulated, how many units would be produced and at what price would they be sold?
a)

Question #9: What is the socially optimal quantity sold and price in this market?
a)

Question #10: Left unregulated, there is a deadweight loss of ______ in this market?
a)

Part II: Short-Answer – You are to answer the following four short-answer questions. Each question is worth up to 5 points. Question #1: Dan, Daron, and John live in a new housing development and would like to have fire hydrants installed to assist the fire department in case of a fire. The above table shows the individual marginal benefits for various numbers of hydrants that could be installed in the neighborhood. Suppose that the marginal cost of installing a hydrant is $10

a)

Adding the MB of our two residents we have MB = $16 at the fourth hydrant, but MB = $4 at the fifth. So four hydrants are optimal

Question #2: Write two multiple choice questions of your own that cover the topics we have discussed thus far in class. I may use the questions that you write on either of the exams. If I do use one of your questions on an exam, you will receive five extra credit points on that exam.

Question #3: Provide an example of a market that is “broken” due to the presence of a positive externality and another that is “broken” due to the presence of a negative externality. Be sure to explain the nature of the externality – e.g., explain the benefit and/or cost that is not accounted for by the decision-maker – and how it affects key market outcomes (prices, quantity, and efficiency).