Spring 2016                                              Economics 201                                       Steven Frederick

 

                                                            ASSIGNMENT NO. 6

                                                                DUE:  APRIL 27

 

RECORD ANSWERS HERE:

 

1i. A, C

1ii. B, C

2. A, B, D

3i. A, B, C

3ii. A, B

4i. A, C

4ii A, B

 

1.  Gasoline prices have been in the news, and this has directed new attention to the issue of appropriate gasoline taxes and automobile use costs.  Suppose that the demand in Michigan for driving private cars can be represented as below.  Assume that each mile driven costs the driver or owner an amount equal to $.45 (in marginal costs such as gasoline, depreciation, etc.).  In addition, each mile driven imposes additional costs on all members of society because damaging pollutants are released into the air.   The line MEC represents these additional external costs, the marginal external costs.  Use this information to answer the following two questions.

1i.  Which of the following is a correct statement about this market?  Circle or identify all that are correct.

 

1. The amount of driving selected by Michigan drivers is b.
2. The amount of driving selected by Michigan drivers is a.
3. The economically efficient amount of driving in Michigan is c.
4. Because of the pollution cost, the economically efficient amount of driving in Michigan is zero.
5. The cost per mile driven in Michigan is $.45

 

1ii.       Which of the following would work to establish a socially efficient amount of driving?  Circle or identify all that apply.

 

            a.  A driving fee of more than $.45 per mile.

            b.  A driving fee per mile equal to MEC at the efficient quantity.

            c.  A tax on gasoline that increases MPC to MSC.

            d.  None; it is not possible to get drivers to reduce the amount of driving.

            e.  None, because no driving is efficient because even one mile of use causes          pollution.

 

 

 

 

2.         If there is a marginal external benefit in a market, then which of the following is correct?  Circle or identify all that apply.

 

            a.  There is too little of a good thing.

            b.  Consumers or produces underestimate the benefit of their activity.

            c.  Government must produce the good in order to have market efficiency.

            d.  A law requiring consumers to buy or consume a minimum quantity of this good            or service could be appropriate.

            e.  The good or service should be taxed to generate revenue for government.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. Answer the following two questions on the basis of the following table, assuming just two                countries, two goods, and only one input, labor.

 

                                              Output Produced by One Unit of Labor

                                                                  (Output/Labor)

 

                                                            Flags                              Fish

                        U.S.                             20                                 120

                        Sweden                       10                                  40

 

 

3i.        Which of the following is true?  Circle or identify all that apply.

 

            a.  The U.S. has an absolute advantage in producing fish.

            b.  The U.S. has an absolute advantage in producing flags.

            c.  The U.S. has a comparative advantage in producing fish.

            d. both a) and c) are true

             e.  None of the above is true.

 

 

3ii.       Which of the following is correct about trade?  Circle or identify all that apply.

 

            a. The U.S. should produce fish and Sweden produce flags.

            b. If the international exchange rate (terms of trade)                                                                         between the US and Sweden is 1 flag for 6 fish then both countries can benefit       from international trade.                                                        

            c. If the output/labor ratio for fish in the U.S. were 80 instead of 120, then  

            international trade would still be beneficial to either the U.S. or Sweden.

            d. All of the above are true.

            e. None of the above is true.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4. It is common for people to wait in lines, sometimes even overnight or for days, in order to buy tickets for sporting events or concerts or for special sales (such as “Black Friday”). At MSU, students “camp out” overnight for season basketball tickets.

 

4i. If consumers wait in lines for a substantial time to make a purchase, which of the following is true?  Circle or identify all that apply.

 

a.  The price is below the market-clearing level.

b.  The sellers could set higher prices.

c.  The price is less than the opportunity cost of the purchase.

d.  All of the above are true.

e.  None of the above is true.

 

 

4ii. Student basketball tickets at Duke University are “free” and are given out on a first-come, first-served basis for each game (there is a line).  If Duke decided to sell tickets to students instead (for money), which statements are correct?  Circle or identify all that are correct.

 

a.  Students from richer families would be better off.

b.  Students who want to study a lot would be better off.

c.  All students would be worse off.

d.  None of the above is correct.