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Department
Economics
Course
ECON 2J03
Professor
Rashid Khan
Semester
Winter

Description
Econ 2J03 Quiz #1 January 17, 2014 Student’s Name: Problem Section: [25 marks] Student’ #: Question #1: [16 marks] Consider the following demand functions and cost functions of a finite resource. P1= 200 – Q 1 [Subscript 1 refers to MWTP in dollars in the current year] MC =1AC = $10 P2= 200 – Q 2 [Subscript 2 refers to MWTP in dollars next year] MC =2AC = $20 Q 1 Q =2160 [Resource constraint] (a) Assume zero discount rate. Find the following in an unregulated (untaxed) market: [3 marks] Total net benefit in the current year = $ Next year’s total net benefit = $ (b) Assume zero discount rate. Find the optimal resource allocation over time. [10 marks] Q 1 Q = 2 Total net benefit in the current year = $ Next year’s total net benefit = $ The optimal tax rate = $ (c) Assume discount rate is 0.5. In other words, 1 + r = 1.5. Find the optimal resource allocation over time. [3 marks] Q 1 Q 2 The optimal tax rate in the current year = $ 1 Question #2: [4 marks] Consider the following table, which represents production possibility curve in a given economy. Combination Goods (G) Environmental Quality (EQ) A 100 0 B 90 1 C 70 2 D 40 3 E 0 4 (a) Consider a movement from point E to point D. The opportunity cost of one unit of G = (b) Consider movement from point B to point A. The opportunity cost of one unit of G = Question #3: [5 marks] The willing-to-pay functions of three individuals (A, B, C) for a given public good in a community are given below. PA= 10 – Q A PB= 20 – 2Q B PC= 30 – 3Q C MC = AC = $24 [Marginal cost as well as average cost of each unit of Q is constant at $24] (a) Find the equilibrium quantity of public good in this community. (b) Find the total costs of public good. (b) Total payments for public goods by individual A = $ Total payments for public goods by individual B = $ Total payments for public goods by individual C = $ 2 There are 25 true-false questions worth 75 marks. Bubble correct answers in the scan sheet. Answer Question #1 on the basis of the following: TB = Total benefit MB = Marginal benefit Subscript 1 refers to individual one. There are 10 identical individuals consuming public goods. Q TB 1 MB 1 Total Benefit Total MB 1 $100 $100 $1000 $1000 2 $180 $80 $1800 $800 3 $240 $60 $2400 $600 4 $280 $40 $2800 $400 5 $300 $20 $3000 $200 1. Public goods satisfy the criteria on non-exclusion and non-rivalry. If the per-unit price of public good is $300, the socially optimal Q (where the total net benefit is maximized) is 5. Answer Questions #2-5 on the basis of the following equations. The inverse demand function of organic apple is given by the following equation. P = 18 – 0.5Q. The original supply function of organic apples before the improvement in environmental quality was P = 2+ 0.5Q. The new supply function due to improvement in environmental quality is P = 2 + 0.3Q. 2. The original equilibrium price is $10. 3. Consumer surplus at the original equilibrium price is $150. 4. The new equilibrium price is $8. 5. The total surplus at the new (after improvement in environmental quality) equilibrium price is $200. Questions #6-7 are based on a concave (bowed out) production possibility curve (PPC) with environmental quality (EQ) in the horizontal axis and goods and services (G) in the vertical axis. Assume further
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