Midterm No. 2 Professor Peter Berck

Midterm No. 2 Professor Peter Berck EEP1/ECON3 Ruth Uwaifo, TA Fall 2003 Emma Aisbett, TA

Question 1 Choose A or B

A. The following questions refer to the article “Conservation Reconsidered” by John Krutilla (1967) American Economic Review.

(a) Krutilla argues against a recommendation based on economic theory with regard to national parks. What was the recommendation that Krutilla was arguing against? (b) List one of the reasons that Krutilla gives for the public value of a national park being greater than the potential revenue that could be collected from park entry fees. (c) List one reason (your own or Krutilla's) why we might expect the value of national parks to increase faster than the value of manufactured goods in the future.

B. Based upon your reading of Field and Field, write a short (2 page at most) essay discussing this statement: “Pollution control policy draws upon command and control (quotas), market based instruments (taxes or marketable permits), and other strategies to lower emissions.” An excellent essay gives examples of at least three different types of strategies and discusses why that strategy might have been chosen for that particular pollutant.

Note: Marks will be deducted for answers longer than 2 pages (unless you have really big writing).

Question 2

(a) Give two examples of a situation in which there is a dead weight loss.

(b) Illustrate ONE of your examples from part (a) with a diagram. Be sure to label all lines and relevant points on your diagram.

Question 3 Hint for this question: Draw yourself a standard diagram showing the cost curves for an individual firm. This will help you to picture the conditions listed in the question.

“In the short run, a firm maximizes profits by choosing output (Q*) such that the marginal cost at (Q*) equals the price received.”

For the above statement to be true, which of the following must also be true. Explain why. A sentence or two should be sufficient. i. The firm is a price-taker (competitive). ii. AVC(Q*)≤P iii. AC(Q*)≤P iv. Marginal cost is increasing v. minimum AVC≤MC(Q*)

“In the long run, a firm maximizes profits by choosing output (Q*) such that the marginal cost at (Q*) equals the price received.”

For the above statement to be true, which of the following must also be true. Explain why. A sentence or two should be sufficient. vi. AVC(Q*)≤P) vii. AC(Q*)≤P

Question 4 A firm produces an output using two inputs as shown on the attached isoquant diagram. Without government intervention, the firm operates at point A on the diagram. The price of labor is one. (a) What is the price of water? (b) What is the cost of producing this output?

Water use decimates wildlife habitat and the government wants to limit its use. The limitation results in the point B being chosen. (c) If point B was chosen in response to a tax on water, what would be the after tax price of water? (d) What would be the cost of production? (e) If point B was chosen in response to a Technology Based Effluent Standard, what would be the price of water and what would be the cost? Isoquants

20 19 18 17 16 15 14 13 12 Q=6 r 11 o b 10 A a L 9 B 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Water