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Economics 455 Abman

San Diego State University Fall 2020

Econ 455 - Practice Quiz 1 Instructions: The following is a practice quiz (used as exam 1 in a previous semester). Please note that, due to the new, online nature of the course, the first quiz this semester may look different in nature.

Solutions to this practice exam will be posted in the form of an asynchronous lecture.

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Multiple Choice - Circle the correct answer (3 points each) 1. Which of the following is NOT true regarding a competitive market? A. There are many independent buyers and sellers. B. The product is homogenous. C. There are no barriers to entry. D. An individual seller may increase the market price by reducing output. 2. Because trucking as an industry involves the generation of pollutants in engine exhaust, A. the supply curve of trucking services overstates the true cost of providing those services. B. the supply curve of trucking services understates the true cost of providing those services. C. the demand curve for trucking services overstates the true benefit of providing those services. D. the demand curve for trucking services understates the true benefit of providing those services. 3. What type of good is a smog-free view of nature? A. Rival and excludable B. Nonrival and excludable C. Rival and nonexcludable D. Nonrival and nonexcludable 4. Which of the following is the BEST example of an externality? A. Airplane runway delays increase asthma attacks for children living near airports. B. New information about the cancer risk from e-cigarettes causes the demand curve to shift down. C. A plastic straw ban requires companies to purchase paper straws to serve in their drinks. D. A tax on imported steel leads to a reduction in the quantity demanded. 5. Horizontal summing of individual demands yields A. the market demand for a private good. B. the market supply of a private good. C. the market demand for a public good. D. the market supply of a public good.

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6. All else equal, a higher discount rate will... A. ... lead you to choose policies that provide higher net benefits in the future and lower net benefits in the present. B. ... lead you to choose present policies that have more uncertainty over present policies that have less uncertainty. C. ... lead you to choose policies that provide higher net benefits in the present and lower net benefits in the future. D. ... lead you to choose policies that benefit producers over consumers. 7. If a program provides $1,000 of benefits each year for three years (this year, next year, and the year after) for a one-time investment of $2,750 this year, the benefit-cost ratio of this program ... A. ... will be greater than 1 under a discount rate (r) of 5% and greater than 1 under a discount rate of 10% B. ... will be less than 1 under a discount rate (r ) of 5% and less than 1 under a discount rate of 10% C. ... will be greater than 1 under a discount rate (r) of 5% but will be less than 1 under a discount rate of 10% D. ... will be less than 1 under a discount rate (r ) of 5% but greater than 1 under a discount rate of 10% 8. If you would rather take $100 dollars than play a lottery with a 1/3 chance of winning $300, 1/3 chance of winning $30 and a 1/3 chance of winning $0, you would be... A. Risk loving B. Risk neutral C. Risk averse D. Risk premium 9. Which of the following is the BEST example of a good that is both nonrival and excludable: A. Cable television B. A cup of coffee C. A fish in the ocean D. A lighthouse 10. The presence of an externality implies... A. the competitive market equilibrium will not be efficient. B. public policy may be able to improve total welfare. C. the private demand and supply functions do not capture all costs and benefits to society D. All of the above.

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Written response 11. The process of producing pulp and paper from mills generates a variety of different environmental pollutants. Suppose the inverse supply and demand functions for pulp and paper are given by the following equations: PS = 10 + 0.1QS PD = 70 − 0.15QD Where Qs correspond to the quantity in tons and P is the price per ton in dollars. The marginal environmental damage of each ton of pulp and paper produced is equal to 0.05 × QS . (a) (12 points) Find the competitive equilibrium price and quantity that emerge in this market.

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(b) (12 points) Find the producer surplus, consumer surplus, total environmental damage, and total surplus from the competitive equilibrium.

(c) (12 points) Find the efficient (total surplus maximizing) quantity and price given the supply, demand, and marginal external cost functions given above.

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12. Suppose 3 local nonprofit organizations want to preserve want to preserve a number of miles of a river. River preservation is a public good. The marginal cost of preserving each mile of river is equal to 8 + 2Q, where Q is the number of miles preserved. The willingness-to-pay for each nonprofit is given as follows: W T P1 = 10 − Q W T P2 = 15 − 1.5Q W T P3 = 5 − 0.5Q

(a) (12 points) Find the optimal number of miles to preserve if you wanted to maximize total surplus

(b) (12 points) If the nonprofits couldn’t cooperate and engaged in river preservation on their own, how many total miles of river would we expect to be preserved?

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13. (10 points) Explain the difference between static efficiency and dynamic efficiency. Under what conditions will the static and dynamic outcomes be the same and under what conditions will they differ?

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