S. Klepper, Economics 73-100, Fall 2010

 

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.

[24] 1. Suppose there is a lake outside a small community of 500 individuals.  If the lake were cleaned up at a cost of $10,000, it would enable the residents of the community to use it for swimming and fishing.  Suppose it was known that half of the residents had a willingness to pay of $25 to use the lake for swimming and fishing and the other half had a willingness to pay of $35 to use the lake for swimming and fishing, but the actual willingness to pay of any individual was not known by others.  Assume that the lake would not be congested even if all 500 residents used it at the same time so the willingness to pay of residents would not depend on the number of residents that used the lake at any time. Unless otherwise noted, assume that no one could be prevented from using the lake under any circumstances.

 

Which of the following statements about the lake are correct based on the advantages and limitations of market decisions making?  Mark true for a correct answer and false for an incorrect one.

 

_____1. It is not economically efficient for the lake to be cleaned up.

 

_____2. Suppose it cost $2,000 to build a fence around the lake and issue keys to individuals that paid a fee to use the lake, with non-payers unable to get in to use the lake.  Then an entrepreneur would build the fence and clean up the lake and charge a common fee to all those who wanted to use the lake.

 

_____3. If contributions were solicited from members of the community to clean up the lake, everyone would contribute at least $20.

 

_____4. If the state government agreed to pay half the cost of the cleanup, the community would be able to raise voluntarily the other half of the cost of the cleanup from its residents.

 

_____5. If the community put up for a vote a referendum in which every member were taxed by $20 to clean up the lake, it would be unanimously passed.

 

[49] 2.   Consider the fifth market experiment concerning short-run and long-run equilibrium.  Suppose that the setup of the experiment in round 2 was as follows. There were 40 sellers and 24 buyers.  All 40 sellers had the same cost schedule as in the version of the experiment conducted in class.  All 24 buyers had the following redemption value schedule (which is different than in the version of the experiment conducted in class):

 

Unit

Redemption Value

1

$1.10

2

  1.05

3

  0.96

4

  0.94

5

  0.90

6

  0.69

7

  0.60

 

 

Furthermore, suppose that in round 2 two out of every five sellers were offered a payment of $.99 if they sold no output and the other three out of five sellers were offered a payment of $1.83 if they sold no output.  All traders would earn a commission of $.05 per unit beginning with the fifth unit transacted—they would not receive any commission on the first four units transacted and then would receive a $.05 commission of all subsequent units transacted.  Sellers could not sell a unit at a price less than the cost of the unit and buyers could not purchase a unit at a price greater than their redemption value for the unit.

 

Which of the following correctly describe round 2 of the experiment under these circumstances based on the model of perfect competition?

 

_____6. Sellers offered a payment of $1.83 if they sold no output in round 2 would not be willing to sell any output in round 2 at prices below $0.90.

 

_____7. Sellers offered a payment of $1.83 if they sold no output in round 2 would sell at least five units of output if they sold any output at all in round 2.

 

_____8.  The price in round 2 would equal $0.69.

 

_____9. All buyers would purchase five units of output in round 2.

 

_____10. Some sellers would sell no output in round 2—i.e., they would exit the market in round 2.

 

_____11.  All sellers offered a payment of $1.83 if they sold no output in round 2 would sell no output in round 2—i.e., they would all exit the market in round 2.

 

_____12. A total of 120 units of output would be sold in round 2.

 

_____13. Over half the sellers would sell no output in round 2—i.e., over half the sellers would exit the market in round 2.

 

_____14. Excluding the commission, all sellers that sold output in round 2 would earn the same total profits they would have earned if they sold no output.

 

_____15. Excluding the commission, sellers offered the payment of $1.83 if they sold no output in round 2 would earn the same total profits whether they sold output in round 2 or not.

 

[27] 3.  The economy has been depressed for the last few years due to the collapse of an overheated housing market.  Congress is anxious to take steps to prevent this from happening again.  It is considering a plan in which the federal government would require buyers of new homes to make a payment into a government fund to help home owners whose homes are foreclosed.  In addition to paying for a new home, buyers would be required to make an additional payment equal to 10% of the cost of the new home into the new government fund. Assume that before this plan was instituted, the housing industry was in long-run equilibrium and was perfectly competitive. Which of the following correctly predict the effects of this plan?

 

_____16. In the short run, the full price of new homes paid by buyers, which includes the price they pay to sellers and their mandatory contribution into the government fund, will be 10% greater than the price they paid for a new home prior to the government plan.

 

_____17. In the short run, the quantity of new homes purchased by buyers will fall by 10%.

 

_____18. In the long run, the program will have no effect on the price of new homes charged by sellers.

 

_____19. After the government plan is instituted, the quantity of new homes purchased by buyers will be lower in the long run than in the short run.

 

_____20. In the long run, the full price of new homes (i.e., the purchase price of new homes paid to sellers plus the mandatory contribution into the government fund) will be 10% higher than the price of new homes paid by buyers before the government plan.