1. The following table shows how the Marginal Benefit of a service varies for four consumers:
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Marginal Benefit (in Dollars)
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CONSUMERS
BEN
CAROLYN
DON
800
600
400
200
400
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100
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400
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100
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a. What are the 2 characteristics that define a public good. EXPLAIN THEM.
b.
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buyers being the four people whose marginal benefits are shown in the table. If the price of
the product is $400, what is the quantity demanded? ,@ ,
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c. Suppose the service is a pure public good with
whose marginal benefits are shown in the table. What is the ~argina!social benefit of two
IJnits of the service?
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d. In the space to the right, draw the demand
curve for the service if it is a pure public good.
Carefully number and label the axes.
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e. If the price of the good is $2,000, what is
efficient output assuming that it is a
private good?
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f. If the price of the good is $2,000, what is the
efficient output assuming it is a pure public
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2. Suppose there are only two people in a society; Lenny and Carl. The only product they
consume is donuts. Their utility functions are given below.
Carl: U,
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Q c = donuts for Carl
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a. If there are 5 donuts, draw the Utility
Possibility Frontier in the area to the right.
Carefully number and label the axes.
Is a level of utility of 16 for Lenny and 12 for Carl a Pareto optimum? EXPLAIN.
b.
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Suppose we use a Rawlsian utility function that focuses on utility. What distribution of
donuts would they say is best in this example? Demonstrate.
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3. The distribution of money income for households in the United States in 1982 was
Lowest Fifth
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10.1 %
Middle Fifth
16.6 %
Fourth Fifth
24.7 %
Top Fifth
44.5 %
a.) In the space to the right, draw the Lorenz Curve.
Carefully labeland number the axis.
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b) Using the graph, show how the Gini coefficient is
calculated.
c. What is the approximate numerical value of the Gini coefficient in the United States today?
(2004 data is most recent.)
d. What has happened to the Gini coefficient from 1982 until 2004?
Circle one:
Increased
Decreased
Stayed the same
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e. What has happened to the degree of income equality in the United States from 1982 until
2004?
Circle one:
Increased
Stayed the same
4. Suppose Peter Griffin likes to set off firecrackers. His Marginal Benefit is
MBp = QF(12 - QF) Where QF= Quantity of firecrackers
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a. How many will he purchase if the pnce i $3 eac
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b. Suppose his wife, Lois, su fers a Marginal Damage of $2 for each firecracker. What is the
socially optimal quantity of firecrackers? DEMONSTRATE.
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c. What is the Coase Theorem?
d.
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Is the Case Theorem applicable here? Discuss.
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5. (20 points) All must do.
There are six market failures and two other reasons why the government intervenes in the
economy. So, we can view a total of eight such reasons. Let us look at COTA, the Central Ohio
Transportation Authority. They provide bus service in Columbus and suburbs. From their
website we see that they state their vision and mission to be:
The Central Ohio Transit Authority will be the transportation provider for central Ohio with
safe, reliable, convenient, affordable and user-friendly transportation for every resident and
visitor.
The Central Ohio Transit Authority is committed to excellence and will deliver superior
transportation services and conduct our business courteously, safely, ethically and reliably.
W e will demonstrate leadership that is fiscally responsible and maintain a work environment
that is safe and productive. All employees are expected to embrace and practice our values
and standards to achieve the objectives of our vision.
Please note that COTA charges fares, e.g. $1.50 for a regular trip and receives tax dollars as the
fare does not cover the cost of ridership.
a. In light of the eight reasons, discuss at least two as justification for the goveinment
providing bus this service.
b. Also, discuss at least two that are not justification for the government intervention.
c. Should the government provide bus service, with tax support and a fee to ride? Justify
your answer.
(Numbers 6-13 are worth four points each. Please answer all.)
6. National defense is different from most goods. We discussed several of these differences in
class. Please cite two and explain how defense is different.
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7. Rosen discusses education as a public good. Please discuss at least one element of education
that causes it to be thought of as a public good.
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8. Give an example of an actual market based system for dealing with pollution. Explain how
the system works.
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9. What is meant by the market failure of stabilization? Give an example of the market failure
and how the government might intervene.
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10. What are network externalities? Give an example.
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11. What are natural monopolies and cite three common methods used to provide the service of
such a monopoly.
12. There are two fundamental theorems of welfare economics. Cite either one and briefly
explain it.
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13. What is a Pigouvian tax? Give an example, either real or hypothetical. Which market failure
does it deal with?
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