Download 1 - Syracuse University

Syracuse University
Department of Economics
Wayne A. Grove
Fall 2000
Economics 601, Section 001
Survey of Microeconomics Theory
Intermediate Microeconomics
For Master’s and Professional Degree Students
Review for Final Exam
I. Externalities
1. An airshed has two firms, each of which currently dumps 7 tons of particulates into the
air each year. The firms differ in what they produce, age of plant, and what options are
available to reduce their emissions. Their engineers have prepared estimates of the
cheapest ways they could reduce emissions, shown in the table below. Environmental
engineers for the municipal authority have estimated the value of reduced emissions, in
terms of reduced illness, increased visibility, etc. Those calculations are also shown in a
table below.
Marginal social cost of reducing pollution
Tons
Reduced
Firm 1
Firm 2
1
25
15
2
35
15
3
40
20
4
50
25
5
55
30
6
60
35
7
70
45
Marginal Social Benefits
Benefits
Tons Reduced
$100
1
90
2
80
3
70
4
60
5
50
6
40
7
30
8
20
9
10
11
Marginal Social Costs
Costs Tons Reduced
(a) What is the optimal amount of total pollution reduction? Explain your answer.
(b) Explain why the answer is not all 14 tons.
(c) If reduction is to be obtained as cheaply as possible, how much should each firm
reduce its pollution?
(d) Compare the efficiency of four possible solutions to the pollution problem: an
emissions fee, a CAC approach, tradable permits, and non-tradable permits.
Regarding the tradable permits’ approach, assume the permits are equally divided
between the two firms. Who would buy and sell? At what price would
(e) What are the equity implications of those four possible solutions? Equity for whom?
II. Public Goods
What is the difference between a private and a public good? Are radio and TV
broadcasts public or private goods? Why? What problems does that cause in attaining
the socially optimal amount of each? Recently the local public radio station was having
its regular fundraiser (they call it a “friendraiser”). Other stations don’t ask the listener to
pay for the radio broadcast. Why not? How do they pay the bills? TV is analogous
except that technology has offered a third solution that directly addresses the original
“public goods” problem. What is the problem? And what are the three solutions, and
how does the new technological solution directly address the original “public goods”
problem?
III. Labor Markets
Sandwich Shop Input Demand
1. If mini-sandwiches cost $2 each, based on the firm’s production function below, graph
the firm’s demand for labor.
Workers
1
2
3
4
5
6
7
# of Sandwiches
16
34
54
72
88
102
114
MP
VMPL
or MRPL
2. In a space labeled “labor market” show (by graphing) an equilibrium wage of $40 per
day.
3. Based upon the firm and market graphs, how many workers would this profitmaximizing firm employ?
4. Very briefly explain why the firm does not employ one more worker than you suggest
in (3)? Also, why not one less worker?
5. Graph what happens to the firm’s input demand choice when the price of minisandwiches rises to $3? Identify the firm’s new optimal level of employment.
IV. The Economics of Time
A. What is the discount rate? Why does the frequency of compounding matter? How
can one convert future values to the present? Why do so? Aside from the consumption
value of college and the vastly increase opportunities it provides, are the present value of
earnings for a college grad greater, less or equal to a high school grad? What is the
optimal rate of extracting exhaustible resources?
B. You’ve just won a $200,000 lottery (after taxes) in $50,000 payments today and for
each of the following three years. What is the present value of these payments if the
interest rate is 5% (annual compounding) and there is no inflation? Would it be better to
receive $150,000 today or the stream of payments? Would it be better to receive
$175,000 today or the stream of payments? Would it be better to receive $190,000 today
or the stream of payments? What rational person would make very different choices and
why?
V. Personal Finance
(a) What are the advantages of CDs (certificate of deposits) over stocks?
(b) What are the advantages of stocks over CDs?
(c) Of what relevance is the fact that the U.S. stock market has gained an average return
of 11% over the last 76 years, but has only registered approximately the average gain
in 4 of those years?
(d) An individual who invested in the best 5 PC stocks when the PC market was first hot
in 1983 would have lost money on four and gained on one (Hewlett-Packard). What
information does this offer investors today in internet-related stocks?
(e) What lesson should be derived from The Economist’s story of Felicity Foresight and
Henry Hindsight?
(f) Why does The Wall Street Journal have reporters throw dart at its paper on a wall?
What outcome has resulted?