Final                                                                Name: ______________________________

PPA 723

 

The total final is worth 30 points.  Each question is worth 2 points, and each sub question is worth an equal share of the 2 points.

 

1)      Say there is a community owned plot of land.  We are deciding whether to put a hockey rink or a set of rose beds on the plot of land.  Five families live in this community, and will share the costs of the project selected equally.  They are meeting to vote on the project tomorrow morning.  Assume a discount rate of 10% is applicable in this case and that the project time horizon is three years (construction year t=0, use year t=1, use year t=2).

a.       If the cost of building the hockey rink is $27,000 right now, and the annual upkeep costs next year and the year after are estimated to be $1,000 per year, what is the present value of costs for the hockey rink project?

 

 

 

 

 

b.      If the cost of building the rose beds is $21,000 right now, and the annual upkeep costs next year and the year after are estimated to be $4000 per year, what is the present value of costs for the rose bed project?

 

 

 

 

Assume you know that the five households have present value benefits represented by the marginal willingness to pay figures described in the following table. 

 

Household 1

Household 2

Household 3

Household 4

Household 5

Hockey rink

4000

8000

7000

10000

5000

Rose Beds

13000

3000

5000

4000

9000

           

c.       If the households vote on these two proposals, will they select the one with the highest net present value?  Explain your answer. 

 

 

 

 

 

 

2) Circle the correct answer

Condition A

Condition B

What type of condition is B for establishing A?

MP is above AP at q

AP is upward sloping at q

 

 

N, NS    S, NN    N,S

The firm is a price taker

The market is perfectly competitive

 

N, NS    S, NN    N,S

The market is perfectly competitive

 

The firm is a price taker

N, NS    S, NN    N,S

There is no close substitute for a good

The good is produced by a monopolist

 

N, NS    S, NN    N,S

The firm produces q>0

 

 

In the SR where MC(q)=p, p > AC(q) in a competitive market

N, NS    S, NN    N,S

The good is a public good.

 

The good is characterized by non-exclusion

 

N, NS    S, NN    N,S

A quantity is the profit maximizing quantity

 

The quantity is produced in an economically efficient way.

N, NS    S, NN    N,S

The last dollar rule is satisfied at a bundle

 

MRS=MRT at a bundle

N, NS    S, NN    N,S

N,NS :   Necessary, not sufficient

S, NN:  Sufficient, not necessary

S,N:  Necessary and sufficient. 


3)  A food stamp policy is put in place in a state.  For our representative consumer impacted by this policy, their initial income of Y is supplemented by a cash value of food stamps of $200.  The initial budget constraint is , where f is food, o is all other goods, and the two prices are subscripted by their commodity.

 

a.       Draw the original budget line and the budget line after the food stamp policy is implemented. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b.      Reproduce the graph you drew for (a) below.  Illustrate on this graph a consumer who has preferences such that their consumption of food will decrease if they are given food stamps worth $200.

4) Deriving demand.

a) Derive a price consumption curve.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b) Derive an individual’s demand curve from the graph you drew in (a).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

c)  Assume you have individual demand curves like the one you drew in (b) for all members of society and for simplicity assume there are only two members of society.  Describe how deriving aggregate (societal) demand for a public good differs from deriving aggregate (societal) demand for a private good.   

 

 

5)  Benefit cost.

Poverty reduction is a major goal of international development agencies.  Currently, two strategies are being considered in a country called Landlockia.  Both are currently estimated to lead to a 5% reduction in poverty at the end of four year period.  The four years are an initial year (t=0) and three years of operation (t=1, t=2, t=3).   We will only be able to select one of these strategies.  The discount rate is 10%.

 

Scenario A:  Land reform.  We will need 14 million USD to pay compensation to the large landholders in year zero.  This land will be redistributed to the landless.  The formerly landless will need training and support in farming that will cost 3 million per year in each year (t=1, t=2, t=3).  It is anticipated that in each of the years t=0 and t=1 the value of agricultural sector production will be 2 million less than it would have in the absence of land reform, while in t=2 and t=3 each it will be 2 million greater than it would have been in the absence of land reform and training.  The present value of the increased agricultural production that will result from the land reform program in years beyond t=3 is estimated to be 26 million.

 

Scenario B:  Construct an international airport and develop a flower export sector with the existing distribution of land ownership.  If we build an airport, cargo planes will be able to transport our flowers overnight for sale in Holland.  It will cost us 7 million dollars in year zero and 1 million per year in each year (t=1,t=2,t=3) to build the airport.  It will also cost us 4 million in each of the three years (t=1,t=2,t=3) to develop our flower export industry.  Present value benefit of the new flower export industry that will be operational as a result of this project after t=3 is estimated to be 30 million.  Present value cost of operating the airport after t=3 are estimated to be 5 million.

 

a)  Calculate Net Present Value for Scenario A.

 

 

 

 

 

 

 

 

 

b)  Calculate Net Present Value for Scenario B.

 

 

 

 

 

 

 

 

c)  Which project should be picked and why?

6) Public goods.

a.  Every summer, a play is performed in an open air theater in a public park.  No admission fee is charged.  We are trying to determine the optimal number of days to perform the play.  In this case, q is the number of days the play will be performed / number of performances (the play is only performed once per day).  There are three people who make up society in this case;  Hortensio, Ophelia, and Yorick.  Hortensio’s demand curve for the number of days the play will be performed is defined by 1100-100*q, Ophelia’s is 500-50*q, and Yorick’s is 400-50*q.   What is total marginal willingness to pay on the societal demand curve for the provision of the fifth day/ performance of the play?  (show how you got this answer)

 

 

 

 

 

 

 

 

 

 

b.  If it costs 1000 to put on a performance, and no effort is made to avoid the free rider problem, what number of days will the play be performed and who will provide it?

7)  The demand curve is given to you as q=20-2*p. 

a.       Fill out the following table (use the relatively higher price / relatively lower quantity pair for the denominator in the elasticity calculation)

Price

Quantity

Elasticity

1

 

------------------------

2

 

 

3

 

 

4

 

 

5

 

 

6

 

 

 

 

b.      Draw this demand curve with price on the y-axis and quantity on the x – axis.  Identify the range over which this curve is elastic or inelastic.

 

 

 

8)  The price of natural gas in this area has gone up over the past year.  Assume each explanation listed below is hypothesized to be the sole cause of this price increase.  Which of the following explanations can you rule out, and which can you not rule out.

 

Explanation

Rule out            Not Rule Out (circle)

Consumers’ income in this area has gone up significantly since last year.

 

 

Rule out            Not Rule Out

A new pipeline was just finished that has made transport costs for natural gas decline.

 

 

Rule out            Not Rule Out

The price of electricity has gone down over the past year.

 

 

Rule out            Not Rule Out

New safety standards in processing natural gas are more costly to meet.

 

 

Rule out            Not Rule Out

Oprah had on a guest recently who had written a book arguing that eating foods cooked with natural gas leads to faster weight loss than eating foods cooked with electricity.

Rule out            Not Rule Out

A specific tax on producers has been introduced for natural gas in the past year.

 

 

Rule out            Not Rule Out

 

 

9)      Circle the correct answer.

Statement

The statement is

(circle the correct answer)

The expansion path traces out all points that are economically efficient.

 

True            False

Consumer surplus is calculated as the area below the demand curve and above the price line.

 

True            False

The slope of an indifference curve is called the marginal rate of transformation.

 

True            False

The income elasticity of demand for an inferior good is a negative number.

 

True            False

A private good is non-rival and non-excludable

 

 

True            False

Increasing the discount rate increases future costs in present value terms.

 

True            False

A monopsonist is the single buyer of a good. 

 

 

True            False

The perfectly competitive market takes us to the socially optimal outcome even if there is an externality generated in production of that good.

True            False

 

10) Match the outcome to the policy that could generate it and show the impact on a supply and demand curve.  Label all curves, axes, and points.

Policy:

Price floor.

Price ceiling.

Imposition of a specific tax on producers.

Decrease in price of an input used in production.

Outcome                                                         Policy

 

Excess Supply                                                      ______________________

 

 

 

 

 

 

 

Equilibrium price paid by consumers                    ______________________

increases and quantity sold decreases

 

 

 

 

 

 

 

Excess demand                                                     ______________________

     

 

 

 

 

 

 

 

 

 

Equilibrium price paid by consumers                    ______________________

decreases and quantity sold increases

11) The demand curve is defined by the relationship p=20-4*q.  Marginal cost / supply is defined by the curve MC=4.

  1. What is the price quantity equilibrium if the market structure is perfectly competitive?

 

 

 

 

 

 

 

 

  1. What is the price quantity equilibrium if the market structure is monopolistic?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. If there is an externality generated by production that can be expressed as MCE=4*q, what is the socially optimal equilibrium in a perfectly competitive market?

 

 

 

 

 

 

 

 

  1. What specific tax τ could be charged in the perfectly competitive market to achieve the socially optimal outcome? 

 

 

 

 

 

 

 

12)   Continue with the information in problem 11.

  1. Draw on a single graph the outcomes of a-d.  Label everything.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1.  Identify the magnitude of consumer surplus, producer surplus, externality, tax revenue if applicable, and total social welfare.

 

Perfect Competition

Perfect Competition with tax

Monopoly

Socially optimal

Consumer Surplus

 

 

 

 

Producer Surplus

 

 

 

 

Externality

 

 

 

 

 

Tax Revenue

 

 

 

 

 

Total Social Welfare

 

 

 

 

 

13)  Complete the following table.

a) Quantity of Output

Fixed Cost

Total Cost

Average Cost

Marginal Cost

Variable Cost

Average Variable Cost

0

 

14

------------

---------

----------

-------------

1

 

 

34

 

 

 

2

 

 

 

 

39

 

3

 

 

 

 

 

19

4

 

 

22

 

 

 

5

 

106

 

 

 

 

6

 

 

 

19

 

 

7

 

145

 

 

 

 

8

 

 

 

21