Question 1:

(a) Explain the impact of external costs and external benefits on resource allocation;

(b) Why are public goods not produced in sufficient quantities by private markets?

(c) Which of the following are examples of public goods (or services)?  Delete the incorrect option

  (i) The Judicial system ................................................................................ Yes/No

  (ii) Pencils ................................................................................................... Yes/No

  (iii) The quarantine service .............................................................................. Yes/No

  (iv) The Great Wall of China ........................................................................ Yes/No

  (v) Contact lenses ........................................................................................ Yes/No

Question 2:

(a) Suppose the income elasticity of demand for pre-recorded music compact disks is +4 and the income elasticity of demand for a cabinet maker's work is +0.4.  Compare the impact on pre-recorded music compact disks and the cabinet maker's work of a recession that reduces consumer incomes by 10 per cent.

(b) How might you determine whether the pre-recorded music compact discs and MP3 music players are in competition with each other?

(c) Interpret the following Income Elasticities of Demand (YED) values for the following and stateif the good is normal or inferior;

YED= +0.5 and YED= -2.5                             

(d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods.

XED= + 0.64 and XED= -2.6