1. Gasoline prices have been in the news, and this has directed new attention to
ID: 1206295 • Letter: 1
Question
1. Gasoline prices have been in the news, and this has directed new attention to the issue of appropriate gasoline taxes and automobile use costs. Suppose that the demand in Michigan for driving private cars can be represented as below. Assume that each mile driven costs the driver or owner an amount equal to $.45 (in marginal costs such as gasoline, depreciation, etc.). In addition, each mile driven imposes additional costs on all members of society because damaging pollutants are released into the air. The line MEC represents these additional external costs, the marginal external costs. Use this information to answer the following two questions.
1i. Which of the following is a correct statement about this market? Circle or identify all that are correct.
a. The amount of driving selected by Michigan drivers is b.
b. The amount of driving selected by Michigan drivers is a.
c. The economically efficient amount of driving in Michigan is c.
d. Because of the pollution cost, the economically efficient amount of driving in Michigan is zero.
e. The cost per mile driven in Michigan is $.45
1ii. Which of the following would work to establish a socially efficient amount of driving? Circle or identify all that apply.
a. A driving fee of more than $.45 per mile.
b. A driving fee per mile equal to MEC at the efficient quantity.
c. A tax on gasoline that increases MPC to MSC.
d. None; it is not possible to get drivers to reduce the amount of driving.
e. None, because no driving is efficient because even one mile of use causes pollution.
2. If there is a marginal external benefit in a market, then which of the following is correct? Circle or identify all that apply.
a. There is too little of a good thing.
b. Consumers or produces underestimate the benefit of their activity.
c. Government must produce the good in order to have market efficiency.
d. A law requiring consumers to buy or consume a minimum quantity of this good or service could be appropriate.
e. The good or service should be taxed to generate revenue for government.
3. Answer the following two questions on the basis of the following table, assuming just two countries, two goods, and only one input, labor.
3i. Which of the following is true? Circle or identify all that apply.
a. The U.S. has an absolute advantage in producing fish.
b. The U.S. has an absolute advantage in producing flags.
c. The U.S. has a comparative advantage in producing fish.
d. both a) and c) are true
e. None of the above is true.
3ii. Which of the following is correct about trade? Circle or identify all that apply.
a. The U.S. should produce fish and Sweden produce flags.
b. If the international exchange rate (terms of trade) between the US and Sweden is 1 flag for 6 fish then both countries can benefit from international trade.
c. If the output/labor ratio for fish in the U.S. were 80 instead of 120, then
international trade would still be beneficial to either the U.S. or Sweden.
d. All of the above are true.
e. None of the above is true.
4. It is common for people to wait in lines, sometimes even overnight or for days, in order to buy tickets for sporting events or concerts or for special sales (such as “Black Friday”). At MSU, students “camp out” overnight for season basketball tickets.
4i. If consumers wait in lines for a substantial time to make a purchase, which of the following is true? Circle or identify all that apply.
a. The price is below the market-clearing level.
b. The sellers could set higher prices.
c. The price is less than the opportunity cost of the purchase.
d. All of the above are true.
e. None of the above is true.
4ii. Student basketball tickets at Duke University are “free” and are given out on a first-come, first-served basis for each game (there is a line). If Duke decided to sell tickets to students instead (for money), which statements are correct? Circle or identify all that are correct.
a. Students from richer families would be better off.
b. Students who want to study a lot would be better off.
c. All students would be worse off.
d. None of the above is correct.
MSC MEC MPC S.45 D- MPB Auto UseExplanation / Answer
1.i)
The externality arises when a third party gets affected by an economic transaction. If the economic transaction benefits the third party and increases marginal social benefit it will create a positive externality and if it imposes cost to the third party and increases the marginal social cost it will create negative externality. In case of positive externality the good is tend to be overproduced than social optimum. In case of positive externality the good is tend to be under produced than social optimum. As with externality market outcome is different than social outcome, the externality causes inefficient market outcome causing deadweight loss to the society.
In the figure above in absense of any regulation the people will equate MPC with MPB and produce a market outcome equal to a. However the social outcome is where the MSC curve intersects the MPB. Therefore, the socially efficient level of production is c. Therefore, the correct options are:
b. The amount of driving selected by Michigan drivers is a.
c. The economically efficient amount of driving in Michigan is c.
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1.ii)
Tax is the financial charge that the government levies on the taxpayers to finance various public expenditures. It is one major source of income to the government. A tax drives a wedge between the market price and the price sellers receive and creates a deadweight loss to the society. A Pigovian tax is the tax imposed by the government on the goods and services that causes negative externality to achieve the efficient outcome of the market.
Therefore, the correct options are:
b. A driving fee per mile equal to MEC at the efficient quantity.
c. A tax on gasoline that increases MPC to MSC.
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2.
In case of positive externality the good is tend to be under produced than social optimum. If there is marginal benefit of an economic outcome there is positive externality in the market. Therefore, the correct options are:
a. There is too little of a good thing.
b. Consumers or produces underestimate the benefit of their activity.
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3.i)
The absolute advantage in producing a good implies that the country has highest productivity in producing that particular good. If a country has comparative advantage in production of a good then the country has lower opportunity cost of producing that good. Nations that produce according to their comparative advantage are maximizing the benefits that they receive from trade and consequently, their national welfare. The benefit that one country accrues from trade is called gains from trade.
Therefore, from the table US has absolute advantage in producing both fish and flag.
The opportunity cost of producing fish in US is 1/6 while that of in Sweden it is 1/4. Then Sweden has relative advantage in producing Fish.
Therefore, the correct options are:
a. The U.S. has an absolute advantage in producing fish.
b. The U.S. has an absolute advantage in producing flags.
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