Final

(you may omit any complete question or questions for 20% credit)

I. What is consumer surplus. This is really two questions: (10 points)

A. Given a demand curve for a good and a price at which you can buy it, how do you measure the consumer surplus you get from that good? You may draw a picture if you think it helps explain your answer.

B. What does what you are measuring mean? Why should you care whether some change increases or decreases your consumer surplus, and by how much?

II. Figure 1 (below) shows the demand and supply curve for onions: (15 points)

A. How many pounds of onions are produced each year? __________ lbs/year

What is their price? _____________$/lb

B. The government imposes a tax of $.10/lb on onions, paid by the producers:

How many pounds are produced? ___________ lbs/year

What price do they sell for? _______________$/lb

How much revenue does the government collect from the tax? __________________$/yr

How much worse off are producers than if there were no tax? _______________$/yr

Consumers? _______________$/yr

What is the excess burden of the tax--the difference between the cost to consumers and producers and the revenue to the government? _________________$/yr

C. Suppose the government imposed the tax on consumers instead of producers; each year you must report the number of pounds of onions you bought and pay the government ten cents per pound. How would your answers to B above change?

D. The government abolishes the tax. Instead, it imposes price control; onions must be sold for $.10 a pound. Lines grow at the stores that sell onions; everyone arrives early, in the hope of getting some of the day's delivery of onions before the store runs out.

How many pounds are produced? ___________ lbs/year

How much better or worse off are consumers than if there were no price control? _________________$/yr

Producers? _________________$/yr

III. In an ordinary competitive industry with open entry and identical firms, how much economic profit does a firm make? Explain. (5 points)

IV: Half way through the quarter, you are thinking of dropping one of your courses. What costs that were relevant to deciding whether to take the course are irrelevant to deciding whether to drop it? Explain. (5 points)

V: Explain in your own words what it means to say that a change is an economic improvement in Marshall's sense (i.e. increases economic efficiency). (10 points)

VI: Answer one of the following questions: (10 points)

A. A competitive industry is efficient in three different ways: The amount produced, how it is produced, and who gets it. In which of those three ways is a single price monopoly efficient? Explain briefly.

B. What is an externality? Why does the existence of externalities lead to inefficient outcomes? Explain.

C. What is a public good? Why does the existence of public goods lead to inefficient outcomes? Explain

VII: Answer one of the following questions: (10 points)

A. Why, from the standpoint of economic efficiency, is theft a bad thing? Isn't it just a transfer that makes one person worse off and another better off?

B. What does economic theory suggest about the nature of organized crime?

C. Why might one prefer a legal rule of caveat emptor (the buyer assumes all risks) or caveat venditor (the seller assumes all risks)? Are there any other alternatives that might be preferable to either?

VIII: Answer, from an economic perspective, one of the following questions: (10 points)

A. Why is marriage a long term contract?

B. Why has divorce become much more common in recent decades?

C. Why did the custom of giving expensive engagement rings become common when it did?

IX: Suppose the government suddenly expands the money supply, with the result that everyone now has more currency than he wants to hold. How do individuals try to solve the problem? What is the result? Explain.

(answer on the back) (10 points)