Econ 260 Final Exam Practice Questions
1. Use a graph to show the deadweight loss associated with a market equilibrium in a
market with a negative production externality.
2. A market has a negative consumption externality with the following marginal costs and
benefits:
MPC = 4 + 0.004Q
MEC = 1 + 0.001Q
MPB = 20 – 0.003Q
Calculate the DWL at the market equilibrium and show on a graph.
3.Aggregate demand question.
Jack’s demand: P = 20 – 0.01Q
Jill’s demand: P = 15 – 0.005Q
a)Derive and graph the AD curve if this is a private good.
b)Derive and graph the AD curve if this is a public good.
c)If MC = $10, what is Q* for a private and public good?
https://www.doczj.com/doc/7e4331248.html, present value question. A new sewage system will take one year to build at a cost
of $200 million. It will provide annual benefits of $5 million for the next 50 years (t = 1, …, 50) and have annual maintenance costs of $0.5 million. At t = 50 there will be a salvage value of $50 million.
a)Calculate the NPV if r = 0.03.
b)What would the annual benefits have to be in order for the project to be worthwhile?
5.Liability laws. How do liability laws provide incentive for firms to reach the socially
efficient level of emissions? Explain using a graph.
6.Green goods. Demand for regular car tires is given by P = 200 – 0.0004Q, and supply is
given by P = 50 + 0.0002Q. Recycled material tires come on the market and demand for regular tires drops to P = 200 – 0.0005Q. If there are 3 units of emissions for each
regular tire, by how much are emissions reduced?
7.Emissions standard question. There are two firms located in different towns. For the
firm in town 1, MAC = 400 – E and MD = 0.5E. For the firm in town 2, MAC = 300 – E and MD = 0.8E.
a)Draw both graphs and calculate E* for each town.
b)Calculate the excess costs in each area if a uniform standartd is set at E = 200. Show
on each graph.
8.Emissions tax question. Polluter 1 has abatement costs given by MAC1 = 200 – 5E1, and
polluter 2 has abatement costs given by MAC2 = 160 – 4E2.
a)How much would polluter 1 save by adopting polluter 2’s technology if there is an
emissions tax of $100? Calculate and show on a graph.
b)How much would polluter 1 save if there were a standard at E = 20 rather than a tax?
c)Why does the emissions tax provide a bigger incentive to improve technology?
9.Abatement subsidy question. A firm has abatement costs given by MAC = 300 – 0.02E.
If an abatement subsidy of $100 per unit of emissions is offered, what incentive does this firm have to abate? Calculate and show on a graph.
10.If an industry has abatement costs given by MAC = 500 – 0.01E and marginal damages
given by MD = 0.02E, calculate the net gain to society from the introductions of a
socially efficient tax. Show on a graph.