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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?