S. Klepper, Economics 73-100, Fall 2011

Exam III

There are a total of three major questions, each weighted according to the points listed to the left of the question. These are the points apportioned to each question. They sum to 100

Each of the major questions has a series of subsidiary questions. Each of these subsidiary questions is a true-false question. To answer the question, indicate in your exam booklet whether the answer is true or false and provide a brief explanation for your answer. Correct answers with insufficient explanations will get no points. When you finish, hand in only your exam booklet.

The exam is open-book and open-notes. If you have any questions at all, then ask the proctor to help you. Do not introduce any assumptions (beyond those introduced in class) without consulting the proctor.

[22] 1. In the last five years natural gas producers have been extracting natural gas from shale rock in Pennsylvania. They inject water mixed with chemicals deep into wells in the land to get the natural gas out. Many people have proposed taxing the production of natural gas from shale in Pennsylvania. Which of the following provide an economic justification for such a tax? Mark true for an answer that provides an economic justification for the tax and false otherwise.

_____1. Shale is a natural resource that is part of the land of the state of Pennsylvania and belongs to the citizens of Pennsylvania, who should benefit from the production of natural gas from shale.

_____2. The production of natural gas from shale results in some chemicals entering the water table, which degrades drinking water in Pennsylvania.

_____3. The state of Pennsylvania has experienced deep budget problems due to the recent recession and would be able to close its deficit through a suitable tax on natural gas produced from shale.

_____4. The waste water from natural gas production is disposed of in rivers in Pennsylvania, which pollutes the rivers.

_____5. The production of natural gas from shale can result in accidents that harm the workers who work on site to extract the natural gas.

[51] 2. Consider the fifth market experiment concerning perfect competition. Suppose that participants were equally divided into buyers and sellers, so there was the same number of buyers and sellers. Furthermore, suppose that sellers were offered $1.55 in round 2 if they sold no output but in round 1 were offered nothing if they sold no output.

Assume that both buyers and sellers were offered a commission of $.05 on each unit they transacted in the first round but in the second round only buyers were offered a commission of $.05 per unit on each unit they purchased and sellers earned no commission on any of the units they sold. All other rules of the experiment were the same as the version of the experiment conducted in class. Which of the following correctly describe rounds 1 and 2 of the experiment under these circumstances according to the model of perfect competition? Mark true if a statement correctly predicts an outcome and false otherwise.

_____6. In round 1, the price would have been $.69.

_____7. In round 1, buyers and sellers would have each transacted four units of output.

_____8. In round 2, the price would have been higher than $.84.

_____9. In round 2, the average total cost of production of sellers would have reached a minimum at five units of output.

_____10. In round 2, buyers would have each purchased two units of output.

_____11. In round 2, all sellers that sold a positive level of output would have sold four units of output.

_____12. In round 2, for sellers that sold a positive level of output, the price at which they sold their output would have been greater than the marginal cost of the last unit they sold.

_____13. In round 2, half the sellers would have sold no output.

_____14. In round 2, suppliers collectively would have sold half as much output as in round 1.

_____15. Sellers would have earned less profit in round 2 than round 1.

[27] 3. The U.S. industry for new homes has been severely depressed for the last few years due to the recession, which has sharply curtailed the demand for new homes. The federal government would like to increase the number of new homes sold and also lower the price of new homes. It is considering a plan in which it would produce a total number of new homes equal to 10% of the number sold last year and put them up for sale at the market price for new homes—i.e., the government will sell its homes at whatever price prevails in the market. Suppose that last year, before the government initiative, the new home industry was in long-run equilibrium and all producers had the same cost curves and produced the same level of output. Which of the following correctly describe the effects of the government plan? Mark true for correct statements and false for incorrect ones.

_____16. In the short run, producers of new homes will sell fewer new homes.

_____17. In the short run, new home producers will earn negative economic profits.

_____18. In the long run, 10% of new home producers will exit the market.

_____19. In the long run, the total quantity of new homes purchased will rise by 10%.

_____20. In the long run, the price of new homes will decline.