Econ 344Homework #1 (Chs.1-6)Assigned: Tues. Jan.24, 2012Due: Tues. Jan.31, 2012Part I. Multiple Choice (3*12=36 pts + 2* 2 T/F =40 pts.) 1. Consider hypothetical Bundles A, B, and C. Suppose you prefer Bundle B to Bundle C and are indifferent between Bundle A and Bundle C. Which of the following is true?a. You prefer Bundle B to Bundle A.b. You prefer Bundle A to Bundle B.c. You are indifferent between Bundle A and Bundle B.d. You prefer Bundle C to Bundle B.e. None of the above2. The reason the slope of an indifference curve changes is because of the:a. diminishing marginal rate of transformation.b. reduction in income as you buy more of one good.c. diminishing marginal rate of substitution.d. non-satiation of preferences.e. none of the above.3. Suppose that the price of pizza increases. The ________ effect means that, holding utility constant, you will consume ________ pizza than you did before.a. income; lessb. income; morec. income; the same amount ofd. substitution; moree. substitution; less4. The Latin phrase ceteris paribus means:a. let the buyer beware.b. other things being the same.c. swim at your own risk.d. whatever will be will be.5. The substitution effecta. is when individuals consume more of one good and less of another.b. is associated with changes in relative prices.c. will have no effect if goods are unrelated.d. is all of the above.6 According to Coase theorem, externalities can be internalized when transaction costs are zero through:a. corrective taxes and subsidiesb. effluent chargesc. charging user feesd. assignment of property rights7 Corrective taxation is best used when which of the following is true?a. Internalizing the externality is difficult.b. The government cannot allocate property rights.c. There are well-defined property rights and costless bargaining.d. All of the abovee. Both a and b8. The First Fundamental Theorem of Welfare Economics states that:a. the competitive equilibrium, where supply equals demand, can always be achieved through government intervention.b. social efficiency can be achieved if and only if government intervenes in the economy.c. the competitive equilibrium, where supply equals demand, maximizes social efficiency.d. social efficiency cannot be achieved in any competitive equilibrium.e. government intervention always reduces social efficiency.9. Taxing the producer of an externality based on the amount of the externality produced is equivalent towhich of the following?a. Subsidizing the consumerb. Subsidizing those outside the marketc. Increasing the producer's input costsd. Increasing the benefits of the consumers in the market10. When firms in a polluting industry have different costs for the technology to reduce pollution, which of the following is efficient?a. Mandating equivalent reductions in pollution from all firmsb. Mandating that each firm reduce pollution up to the point where the marginal cost of reducing pollution is equal to the total social benefit of the reductions for each firmc. Mandating that each firm reduce pollution up to the point where the marginal cost of reducing pollution is equal to the marginal social benefit of that reduction for each firmd. Mandating that each firm reduce pollution up to the point where the marginal benefit of doing so is zeroe. Both a and b11. Suppose the Consumer Price Index rises 3% from this year to next year. Suppose the price of your favorite pizza rises 3% over that time as well. Which of the following is true?a. The nominal price of pizza has increased.b. The real price of pizza has increased.c. he real price of pizza has fallen.d. Both a and be. Both a and c12. Which of the following would be treated differently under cash accounting than under capital accounting?a. Spending $5 billion to construct new office buildingsb. Spending $3 billion on unemployment benefitsc. Selling a national forest for $300 milliond. All of the abovee. Both a and c13. A subsidy for pollution not produced can induce producers to pollute at the efficient level.a. True.b. False.c. Uncertain.14. Pollution rights can be traded and are always efficient.a. True.b. False.c. Uncertain.Part II. Short Answer (6*10 = 60 pts) 1. Draw the demand curve Q = 200 – 10P. Calculate the price elasticity of demand atprices of $5, $10, and $15 to show how it changes as you move along this linear demandcurve. Label the axes and identify the intercept and slope values. (Hint: use $10 as the basecase to assess a price decrease and then a price increase)2. You have $100 to spend on food and clothing. The price of food is $5 and the price ofclothing is $10. a. Graph your budget constraint. Identify the intercepts and the intercept values.b. Suppose that the government subsidizes clothing such that each unit of clothing ishalf-price, up to the first 5 units of clothing. Graph your budget constraint in thiscircumstance.3. The Keystone Pipeline has been proposed to transport crude oil from the Alberta Canada oil fields to refineries in the US Gulf region. A number of environmental organizations have opposed the pipeline on grounds that it is likely to cause environmental damage (ED). Producers consider only their private marginal costs (PMC). Society will benefit by MB if the pipeline increases oil supplies.a. graphically show the optimal level of oil supply if no environmental costs occurb. If environmentalists are correct and environmental damage (ED) occurs, show how this affect societal costs.c. find the new equilibrium level if environmental costs are included .d. what is a possible method for achieving the social optimum?4. Suppose that the demand for a chemical is given by Q = 100 – 2P, where quantity is measured in pounds. The market supply is given by MC = 5. Assume that the marginal external damage of this product is $3/unit.a. What is the equilibrium price and quantity of this good without government intervention?b. What level of taxation would generate the socially efficient level of the good?5. The private marginal benefit associated with limestone quarry products consumption is PMB = 360 -4Q and the private marginal cost associated with its production is PMC = 4Q. The marginal external damage associated with limestone mining is MD= 2Q. To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should be set to achieve social optimum. (Hint: social optimum found at PMB = SMC)6. A steel factory has the right to discharge waste into a