micro economics test / quiz prep and need a sample draft to help me learn.
The Answers are included with questions I need you to rewrite (paraphrase) and redraw the graphs because the professor uploaded the answers I still need to submit it but it has to be my work. ALL answers ARE correct. There is NO NEED TO SOLVE ANY OF THEM.JUST paraphrasing AND DRAWING THE GRAPH AGAIN
Due October 25th 1. Explain whether the following are examples of externalities. a. Alisha did not sleep well because her neighbor was playing loud music. b. Rochelle was late for a job interview because her alarm did not go off. c. José, who is allergic to pollen, is sick from the flowers that grow in his garden. Answer: (a) is the only externality. In (b), Rochelle was late because of an alarm that was in her control. Similarly, in (c), Jose is aﬀected by the pollen, but he is making decisions where he is considering all the costs and beneﬁts (we know this because the garden is under his control and he is choosing to grow the ﬂowers). If the garden had been his neighbor’s garden, then it would have been an example of an externality. 2. If the production of a particular good causes a negative externality, would the equilibrium quantity in a competitive market be less than the efficient quantity or would it be greater than the efficient quantity? Answer: The marginal social cost of a good with negative externalities is greater than its marginal private cost. Since firms consider the marginal private cost of a good, more of the good is produced than is socially desirable. 3. What does it mean to say that an individual or a firm has internalized an externality? Answer: Externalities are external costs or benefits that firms or consumers do not consider when making decisions. When incentives are altered such that an externality is taken into account, firms and individuals are said to have internalized the externality. So, for example, suppose I raise bees next door to your apple orchard. The bees pollinate your tress and so there is an externality. The externality will be internalized if I buy your orchard. 4. The European Union has banned certain pesticides for two years after studies found links between the use of these insecticides and a decline in the bee population. In particular, research has shown that the use of imidacloprid, clothianidin, and thiamethoxam on flowering crops have adversely affected the honeybee population in North America and Europe. a. Consider the private market for these pesticides. Use supply and demand curves to show the equilibrium level of pesticides that will be produced and consumed. Q1 and P1 are the market equilibrium. PMC is the private marginal cost (i.e., supply curve). b. How might the impact of the insecticide on honeybees be modeled as a marginal external cost? Show the deadweight loss from this externality in the graph you drew for the first part of this question. See below. c. Is the private market outcome socially efficient? No
5. Jones and Smith live in the same apartment building. Jones loves to play his opera recordings so loudly that Smith can hear them. Smith hates opera. Jones receives $100 of benefits from his music and Smith suffers $60 of damages. a. From an efficiency perspective, should Jones be allowed to play his opera CDs? Yes, the benefit from playing the CDs (the $100 benefit) outweighs the costs (the $60 damage). b. Suppose the apartment building does not have any rules about noise. Jones and Smith can bargain at zero cost. Will they reach an agreement where Jones gives up his beloved operas? No, there is no price that Smith is willing to pay Jones that will result in Jones being willing to give up his CDs. c. Now suppose the apartment building passes a rule that says residents are not allowed to play music their neighbors can hear if any of the neighbors object. As before, Jones and Smith can bargain at zero cost. Will Jones be allowed to play his music? Yes: Jones would be willing to pay Smith anything less than $100 to play his music. As long as Smith is compensated at least $60, he will be better off with the music being played. For example, if Jones paid Smith $80 and played his music, both would be better off. 6. Suppose you are willing to pay $15 for one framed painting in your dorm room and $5 more for a second painting. Your roommate is willing to pay $10 for one painting and has no interest in asecond painting. a. Sketch your individual demand curve for paintings (a step function with maximum quantity of 2). Also sketch your roommate’s demand curve for paintings. b. Assume you have a divided room such that the paintings are private goods. Sketch the overall demand curve for paintings by both you and your roommate. c. Instead assume the room is quite open such that each painting is a public good that both you and your roommate can enjoy. Sketch the new social benefit curve (the “market demand”) for paintings.
a. Malaria is spread by mosquitos. That is, a mosquito spreads malaria by biting an infected person and later infusing malaria into a different person. A study by Jeffrey Sachs and others shows a strong correlation between the incidence of malaria in a country and poverty. Malaria is known to exist in poor countries; it has also been found that the incidence of malaria exacerbates poverty. One of the simplest and effective ways of preventing the occurrence of malaria is by using insecticide-treated nets. Consider the private market for ITNs. Use supply and demand
curves to show the equilibrium level of nets that will be produced. Is this outcome socially efficient? b. In the graph, how would you account for insecticide-treated nets’ effect on poverty? What happens to the level of output in the market? c. How could the government encourage the production of the efficient number of nets?
2. Three roommates Tinker, Evers, and Chance share an apartment. It is really cold outside and they are considering turning up the thermostat in the apartment up by 1, 2, 3, or 4 degrees. The marginal cost for each degree is $8. Their individual marginal benefits from making it warmer in the apartment are as follows: Tinker Evers Chance 1 degree $5 $4 $3 2 degrees $4 $3 $2 3 degrees $3 $2 $1 4 degrees $2 $1 $0 a. Find the marginal social benefit from making it 1, 2, 3, or 4 degrees warmer. MSB 1 degree $5+$4+$3 = $12 2 degrees $4 + $3+ $2 = $9 3 degrees $3 + $2 + $1 = $6 4 degrees $2 + $1 + $0 = 3 b. By how many degrees should they raise the temperature? By two (where the marginal benefit > marginal cost). 3. Suppose demand is QD = 12 – P supply is QS = P. There is a constant positive externality of $4 per unit (Marginal External Benefit, MEB = $4). a. Find the market equilibrium quantity and the socially optimal quantity. Show on a graph similar to exhibit 9.8. b. If the government were atemp�ng to increase eﬃciency, should they provide a subsidy or levy a tax? c. What should be the amount of the subsidy/tax?
Due November 1st Chapter 9: 1. Classify the following goods as private goods, common pool resources, club goods, or public goods. a. Health insurance b. Radio spectrum c. A video on YouTube d. A mosquito control program in a city e. A library’s collec�on of e-books Answers: a. Health insurance is a private good. It is non-rival in that it can be consumed only by one person. It is excludable in the sense that people can be prevented from using it if they don’t pay for it. (Note: Whether health insurance is rival and excludable is a diﬀerent ques�on from who should pay for it – such as individuals, employers, or the government. This is a diﬀerent ques�on.) b. Without any regula�ons, the radio spectrum would be a common pool resource. However, at least in the United States, there have been successful eﬀorts to limit who broadcasts at various frequencies. Thus it is possible for the radio spectrum to become a private good. c. A video on YouTube has the proper�es of a public good. Once it has been uploaded, any number of users can view the video without aﬀec�ng others’ consump�on (and is therefore nonrival in consump�on). The person who uploads the video cannot selec�vely deny access to certain people (it is nonexcludable). If YouTube can ﬁgure out a way to exclude users then its videos become a club good. d. A mosquito control program in a city is a public good. The residents of the city consume this service simultaneously (it is nonrival) and no one can be excluded from the beneﬁts of the program (it is nonexcludable). e. E-books are club goods. They are non-rival (my reading the book does not preclude your reading the book at the same �me). The library could exclude people from reading the book by limi�ng the number of people who can “borrow” an e-book at any one �me. 11. When does the free-rider problem arise? Answer: The free-rider problem arises when a person has no incentive to pay for a good because failure to pay does not prevent consumption. For example, even if an individual does not pay for national defense, the military protects him nonetheless. This implies that a single individual does not have an incentive to pay for a service that he can consume, as long as others are paying for it. 13. What is meant by the tragedy of the commons? Use an example to explain your answer. Answer: The tragedy of the commons refers to the depletion of a common pool resource due to open access. When deciding how much to use, everyone using the common pool resource considers only his or her own costs of use. But this use depletes the resource for everyone accessing it. Since this extra cost is external, individuals end up using too much of the resource.
Congested roads without tolls are a good example of the tragedy of the commons. People who use the road consider their benefits but ignore the costs they impose on other drivers by forcing them to drive more slowly.
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