Economics Answers

“Increase in net capital inflow will increase interest rates in the domestic loanable funds

market” – do you agree with this statement? Explain by drawing a diagram and

comment how you think investment will change if there is an increase in capital inflow.

Cold drinks and pizza are complements because they are often enjoyed together. When the price of cold drinks rises, what happens to the supply, demand, quantity supplied, quantity demanded, and the price in the market for pizza?

Assume that a competitive firm sells it’s output for a price of 16 dollars per unit and

producing q units of output costs the firm 1/3 q3 dollars. The firm’s production process

pollutes a nearby river and total environmental damage caused is e = 3q − a where

a is the amount of pollution abatement effort. The firm’s cost of abating a units of

pollution is 1/3a3.

(a) Find the firm’s profit maximizing output quantity and the resulting amount of

environmental damage in the absence of any regulation.

(b) If the firm must pay a tax of $7 per unit of output produced, find the new profit

maximizing output quantity and amount of environmental damage.

(c) Assume there is public backlash to the tax on output, so the government needs

to determine what subsidy per-unit of abatement effort would replace the tax

and yield the same environmental damage. What subsidy on abatement effort

should the government set?

The private marginal benefit for commodity X is given by 10 - X, where X is the

number of units consumed. The private marginal cost of producing X is given by 4 +

x and producing this commodity creates a negative externality, the marginal external

cost is constant at $2.

(a) How much X is produced without government intervention and at what price?

What are producer and consumer surplus in this case?

(b) What is the efficient level of production of X?

(c) Suggest a Pigouvian tax that would lead to the efficient level of production.

(d) What is the producer surplus in this market with the optimal Pigouvian tax?

(e) If some of the government revenue is spent compensating taxed producers for

their lost surplus, how much remains?

A. Choose a product with which you are familiar (i.e. Starbuck’s Frappuccinos) that will be

affected by the dynamics of the market economy.

B. Make up two different headlines for two graphs relating to factors causing a shift in demand,

then show how each will impact the product related to either surpluses or shortages and

ultimately a change in the equilibrium price. One must be an increase in demand, the other a

decrease in demand. You may only use each cause of a shift once!!! such as population.

C. Do the same for two factors causing a shift in supply. You must draw a separate graph for

each factor. You may only use each cause of a shift once!!! such as technology.

D. Type a paragraph about each of your graphs (four total) to predict whether the product will

demonstrate an increase or decrease in demand or supply and what will have to happen

economically (i.e., shortage, surplus, price increase, price decrease).

Consider a community of two families A and B, who contribute EA and EB dollars to

the community’s events budget. Community events are a public good and the total

quality of events provided E = EA + EB.

Assume each family has an annual income of $60 which it splits between the events

budget and all other consumption spending X. Family utility functions are

given by UA = XA^1/2 E^1/2 and UB = XB^1/2E^1/2.

(a) What event budget would maximize the social welfare function W = UA + UB?

(Study tip: You can either set up and solve the social planner’s problem, or

recall the necessary condition for optimal public good provision. I recommend

the latter.)

(b) If households privately decide how much to contribute to the event budget, what

will the total budget be?

(Study tip: Begin by finding each household’s best response to the other, then

solve. You can use the fact that the problem is symmetric to save time in this

step.)

The government defines poverty as living without the basic human needs

due to an inability to afford them. Which of the following is not listed as

one of those basic human needs?

Drawing diagram explain the process of “crowding out”. Also explain why the private 

sector might find budget deficit detrimental to their business planned projects

Section D: Essay Writing. (500 words limit) (10 marks)

Write ONE essay from the following topics. Spend at least 80 minutes in this section.

1.     Discuss the merits of a proposal that the government should impose a tax or subsidy where a non-renewable resource is supplied monopolistically in order to increase the social net benefit. You may contextualize this to your home-country or to a current development that you may be aware of. (10 marks)

1.     Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO₂ abatement standard. Further assume that the following SO₂ abatement cost functions have been estimated by each country:

                                              TAC_US = 500 + 1.5(A_US)²

                                              MAC_US = 3 A_US

                                              TAC_CAN = 1000 + 3(A_CAN)²

                                              MAC_CAN = 6 A_CAN

A.     If the countries implement a uniform abatement standard, find the resulting values of TAC and MAC for each nation. Based on these values, is there an economic incentive the two nations to participate in an emissions trading program? Explain. (10 marks)

B.     Assuming a trading program is enacted, find the cost savings associated with a cost-effective abatement solution? (12 marks)

C.     What must be the price of a tradeable permit to achieve the cost-effective abatement allocation? (3 marks)