Economics 4220 – Flu vaccines provide both private benefits to individuals
Economics 4220
May 2016
Problem Set #1
Name:
________________________________________
Instructions: This problem set consists of two parts. The first part is comprised of 10 multiple
choice questions that will be worth 2 points each. The second part is comprised of four short
answer questions. You are to answer all four
of the questions. Each question will be
worth up to five points.
Part I: Multiple
Choice –
You are to answer all ten of the following multiple choice questions. Each question is worth two points.
Question #1: Flu vaccines provide both private benefits to
individuals and positive external benefits to other members of society. Without government intervention, we would
expect:
A) Too
many individuals purchasing flu vaccines since the external benefits would not
be considered
B) Not
enough individuals purchasing flu vaccines since the external benefits would
not be considered
C) The
socially optimal number of flu vaccines being purchased
Question #2:Steve
purchase pizza which costs $3 a slice and Diet Coke which costs $0.75 a
can. At his current consumption level,
the marginal rate of substitution between pizza and Diet Coke is 6. Given this information, we know that Steve
is:
a) Maximizing
his utility
b) Consuming
too much pizza and not enough Diet Coke
c) Consuming
too little pizza and too much Diet Coke
Question #3: Many economists have documented a strong
correlation between income and environmental quality across countries – as
nations (individuals) become wealthier, they are willing to spend more to
protect the environment. Based on this
information, environmental quality is a:
a) Normal
good
b) Inferior
good
c) A
private good
Use the following figure to answer Questions #4 and
#5
Figure:
Marginal Private Benefits and Marginal Social Benefits
.png”>
Question #4:
Without government intervention, this market will produce __________ units at a
price of _____________
A) Q0;
P1
B) Q1;
P0
C) Q1;
P2
D) Q2:
P1
Question #5: If the government were to intervene in this
market and encourage individuals to fully internalize the external benefits of
consumption, what would be the resulting equilibrium quantity and price in this
market?
A) Q0;
P1
B) Q1;
P0
C) Q1;
P2
D) Q2;
P1
Use the table below to answer questions #6 and #7
.jpg”>
Dave and Art live in a new housing
development and would like to have streetlights installed to illuminate the
streets and sidewalks at night. The
table shows Dave and Art’s individual marginal benefits for different
quantities of streetlights that could be installed in the neighborhood. Suppose that the marginal cost of installing
a streetlight is $6.
Question
#6:
If Dave had to pay for streetlights on his own, how many streetlights
would there be?
a) 0
b) 1
c) 2
d) 3
Question #7: What is the socially optimal number of
streetlights that should be installed in the neighborhood?
a) 1
b) 2
c) 3
d) 4
Use graph below to answer questions #8through
#10.
.png”>.png”>.png”>.png”>.png”>
Question #8:If
this market were left unregulated, how many units would be produced and at what
price would they be sold?
a) 8
units and a price of $8
b) 8
units and a price of $24
c) 12
units and a price of $12
d) 12
units and a price of $36
Question
#9:What is the socially optimal quantity
sold and price in this market?
a) 8
units and a price of $8
b) 8
units and a price of $24
c) 12
units and a price of $12
d) 12
units and a price of $36
Question
#10:
Left unregulated, there is a deadweight loss of ______ in this market?
a) $16
b) $24
c) $48
d) $96
Part
II: Short-Answer –You
are to answer the following four short-answer questions. Each question is worth up to 5 points.
Use the following table to answer Question #1
# of Fire Hydrants
Dan’s Marginal Benefit
Daron’s Marginal Benefit
John’s Marginal Benefit
1
12
16
22
2
10
12
16
3
8
8
10
4
6
4
4
5
4
0
0
Question #1: Dan, Daron, and John live in a new housing
development and would like to have fire hydrants installed to assist the fire
department in case of a fire. The above
table shows the individual marginal benefits for various numbers of hydrants
that could be installed in the neighborhood.
Suppose that the marginal cost of installing a hydrant is $10
a)
On the same graph, draw the individual
and social demand curves for fire hydrants.
b)
If John had to pay for the installation
of fire hydrants, how many would be installed in the development? What would happen to your answer if Dan were
instead asked to pay for the installation?
c)
What is the socially optimal number of
fire hydrants in the neighborhood?
Question
#2: Write
two multiple choice questions of your own that cover the topics we have
discussed thus far in class. I may use
the questions that you write on either of the exams. If I do use one of your questions on an exam,
you will receive five extra credit points on that exam.
Question
#3:Provide an example of a market that is
“broken” due to the presence of a positive externality and another that is
“broken” due to the presence of a negative externality. Be sure to explain the nature of the externality
– e.g., explain the benefit and/or cost that is not accounted for by the
decision-maker – and how it affects key market outcomes (prices, quantity, and
efficiency).
Use the following table to answer
Question #4
Unit
Private MC
External MC
Social MB
1
10
5
60
2
15
10
55
3
20
15
50
4
25
20
45
5
30
25
40
6
35
30
35
Question
#4:
a) If
left to the private market, how many units would be produced and at what price
would they be sold?
b) What
is the socially optimal price and quantity in this market?
c) Calculate
the deadweight loss that results when this market is left unregulated.
