1. Consider a competitive market with a PMB = 22 - q and a PMC = 10 +q. There is a negative production externality of e = q, where q is the level of output in the market, the government can achieve the efficient level of output by
a) implementing a per-unit tax of $4 on suppliers
b) implementing a per-unit tax of $6 on suppliers
c) implementing a per-unit tax of $8 on suppliers
d) implementing a per-unit tax of $10 on suppliers
e) None of the above.
2. Consider a competitive market in which the PMB = 180 - 2q and the SMC = q. In this market, however, there is a positive consumption externality of $60 per unit consumed. What government intervention will result in the efficient outcome?
a) The government implement a tax of $60, levied on consumers.
b) The government provide a consumption subsidy of $60 per unit, provided to consumers.
c) The government subsidize producer by $60 per unit
d) Both b and c
e) None of the above
3. The private marginal benefit a person derives from a year of education is given by PMB = 110 - 6Q, where Q is the number of years spent in school. The private marginal cost per year of education is given by PMC = 20. There is a positive consumption externality of $30 per year of school attended. Which of the following statements is true?
a) The market equilibrium is efficient.
b) The DWL from underproduction in the market is $75.
c) In the efficient outcome a person gets 18 years of education.
d) The DWL from underproduction is $60.
e) There is underproduction in the market outcome compared with the efficient level of output by 30 units.
4. Consider the market for political advertising during an election campaign. The private marginal cost of producing a political advertisement is PMC = 200 + 2q where Q is the quantity of advertisements, and the private marginal benefit (demand) curve is PMB = 1000 - 3q. The marginal negative production externality e in the market is e=3q (note that the externality from producing an additional advertisement increases with the number of advertisements). Which of the following statements is true?
a) The socially efficient level of output is q=200, which suppliers will produce if a production tax of 600 per unit is imposed per political advertisement.
b) The socially efficient level of output is q=100, which suppliers will produce if a production tax of 300 per unit is imposed per political advertisement.
c) The socially efficient level of output is q=160, which suppliers will produce if no taxes are imposed in this market.
d) The deadweight loss in the market equilibrium is $18000.
e) The deadweight loss in the market equilibrium is $9000.
5. The University is considering the level of light to provide at night on campus. Cynthia and Shirley are the only students who work on campus at night. Cynthia's marginal benefit for light is given by MBCynthia = 40 - 4Q, where Q is the brightness of light; while Shirley's marginal benefit is MBShirley = 20-2Q. If there are no fixed costs, and the marginal cost of providing light is given by MC=12, then what is the optimal brightness of light for the university to provide?
a) 8
b) 10
c) 7
d) 4
e) None of the above
6. Two pirates, Red Beard and Yellow Beard, have just seized one hundred gold coins, and now it's time to haggle over the loot. The bargaining rules are: Red Beard gets to propose a division of the one hundred coins. If Yellow Beard accepts the proposal, then the coins are allocated and the game ends. If Yellow Beard does not accept, coins get thrown overboard and the game ends. How many coins will Red Beard get in the outcome of this bargaining game?
a) 100 coins
b) No coins
c) 50 coins
d) 75 coins
e) There is no Nash equilibrium of the game.
7. Consider a competitive market in which the PMB = 180 - 2q and the SMC = q. In this market, however, there is a positive consumption externality of $60 per unit consumed. What is the DWL that results in the market equilibrium?
a) $200
b) $600
c) $400
d) $500
e) $0