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ECO 373

Summer II 2022

Midterm

Subjective Questions: (80 points)

1. List and explain the three types of values, and total willing to pay (TWP). (5 points)

2. The demand curve for a product is given by QD = 400-20P and the supply curve for a product is given by QS = 16P-32. (10 points)

a.  Illustrate the demand curve and the supply curve on the same graph. (2 points)

b.  Find the equilibrium price and quantity.  (2 points)

c.  Find numerical values for the consumer surplus and the producer surplus. (2 points)

d.  Identify consumer surplus and producer surplus on your graph. (2 points)

e.  Find numerical values for the total willingness to pay for the equilibrium quantity and the total variable cost of supplying the equilibrium quantity.  Identify these areas on your graph. (2 points)

3. The externality graph. The demand curve for a product is given by QD = 400-20P and the supply curve for a product is given by QS = 16P-32.  (10 points)

a. Find the equilibrium price and quantity and illustrate graphically. (2 points)

b. Suppose MC_E = 0.5Q.  What happens to the marginal external cost (the marginal increase in damages from pollution) as more of the good is produced?  (2 points)

c. Find the marginal social cost MC_S = MC_P + MC_E.  Illustrate this new cost curve on your graph. (2 points)

d. Find the socially optimal equilibrium price and quantity. (2 points)

e. Which area on the graph represents the net gain from moving to the socially optimal equilibrium point? (2 points)

4. Total benefit for the society of producing product X is given by TB = 314X - 1.6X². Total cost for the society of producing product X is given by TC = 50X + 1.7X².  Graph total benefit and total cost on one graph, and marginal benefit and marginal cost on the other graph.  Use the first equimarginal principle to find the optimal amount of X to produce. (10 points)

5. Explain the characteristics of pubic goods and list some examples of public goods.  (5 points). Explain why public goods will be underprovided in a private market. (5 points)

6. (1) Define common property (“Common-pool”) resources and give some examples of common property. (5 points)

(2)  Five fishermen live in a village and have no other employment or income earning possibilities besides fishing.  They each own a boat that is suitable for fishing, but does not have any resale value.  Fish are worth $5 per pound and the marginal cost of operating the boat is $500 per month.  They all fish in a river next to the village, and they have determined that when there are more of them out there on the river fishing, they each catch less fish per month according to the following schedule:

Boats Fish Caught per Boat (pounds)

1 200

2 190

3 175

4 155

5 130

a.  If each fisherman acts in his own best interest, will he continue to operate his boat each           month?  If so, how much income will he earn per month? (5 points)

b. If the fishermen band together and act as a group, how many boats will they choose to operate?  If income is divided evenly, how much will each fisherman make? (5 points)

c. Use the example in Question (2) to explain why common property resources tend to be overused. (5 points)

7. Calculate the Net, and NPVs for year 0 till year 10, and Sum of the NPVs over the 11 years for different discount rates. (15 points)