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Berkeley ECON 98 - Economics Summary 2

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Econ 98-Chiu Economics Summary 2 Spring 2004Name & SID: Date:True, False, or Uncertain. Explain your answers and draw graphs if they help your explanation. You will be graded on your explanation more than your answer.1. Government taxes in a market with negative externalities always reduce the deadweight loss to society.2. Government subsidies in a market with positive externalities always reduce the deadweight loss to society.3. The marginal cost of producing a public good is zero.4. The market demand curve for a public good is the horizontal summation of each person’s individual demand curve.Page 1 of 6Econ 98-Chiu Economics Summary 2 Spring 2004Name & SID: Date:5. Suppose an upward-sloping market supply curve and downward-sloping market demand curve. A specific excise tax of $2 will increase the market equilibrium price by $2.6. Consumers and producers always share the tax burden for a specific excise tax.Externalities.1. The market for widgets causes a negative externality (i.e. pollution cost) to society. Assume acompetitive market. Graphically show the following market conditions:Market Demand (D) = -Q + 60Marginal Private Cost (MPC) = Q + 5Marginal Cost of Pollution = Marginal External Cost (MEC) = $5Marginal Social Cost (MSC) = MPC + MECPage 2 of 6Econ 98-Chiu Economics Summary 2 Spring 2004Name & SID: Date:2. Calculate the market price and quantity. Label Pc, Qc.3. Calculate the total amount of pollution cost at market equilibrium.4. Calculate the socially-optimal price and quantity. Label P*, Q*.5. Calculate the deadweight loss at market equilibrium.6. Calculate the total amount of pollution cost at the social-optimum.7. The government implements a $6 specific excise tax on widget firms. Calculate the new market price and quantity. Label Pc1, Qc1.Page 3 of 6Econ 98-Chiu Economics Summary 2 Spring 2004Name & SID: Date:8. Calculate the new deadweight loss at the new market equilibrium. Compare the deadweight loss from question 5 to the new deadweight loss. Which result is better for society?Public Goods.1. William, Mary, and Philip face the following demand curves for parks. They are the only three people who demand parks. Assume parks are public goods. Find the market demand curve for parks. Circle your final answer.William’s demand curve: P = -2q + 1Mary’s demand curve: P = -q + 3Philip’s demand curve: P = -3q + 22. Sketch the market demand curve for parks.Page 4 of 6Econ 98-Chiu Economics Summary 2 Spring 2004Name & SID: Date:3. The government faces the following marginal cost for parks. What is the socially-optimal price (P*) and quantity of parks (Q*)? Could private firms rather than the government produce and price at the socially optimal levels? Sketch both the market demand and the government’s marginal cost.MC = Q4. What is the free-rider problem? What causes the free-rider problem?Microeconomics Review.1. Apples and oranges are substitutes. The price of apple increases. What happens to the wages of orange workers? Ignore the feedback effects. Assume a Stage 1 supply curve. Assume competitive markets. Please explain your answer with labor and output graphs.Page 5 of 6Econ 98-Chiu Economics Summary 2 Spring 2004Name & SID: Date:2. Circle the Nash Equilibrium. How do you know this is the Nash Equilibrium?BrendanWillyCheat Do not cheatCheatBrendan: $10b ProfitsWilly: $10b ProfitsBrendan: $40b ProfitsWilly: $3b ProfitsDo not cheatBrendan: $3b ProfitsWilly: $40b ProfitsBrendan: $5b ProfitsWilly: $5b Profits3. Draw a monopolistically competitive firm graph with a positive externality. Label the market equilibrium: Pc, Qc. Label the social-optimum: P*, Q*. Ignore Stage 2 effects. Shade in the deadweight loss.4. Draw a natural monopoly graph with a negative externality. Label the market equilibrium: Pc, Qc. Label the social-optimum: P*, Q*. Shade in the deadweight loss.Page 6 of


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