Student: _____________________ Date: _____________________
Instructor: Robin Dhakal Course: Hubbard/O’Brien: Essentials of Economics, 6th Edition
Assignment: Exam 1
(1) tax subsidize
Suppose the figure to the right illustrates the market for toilet paper, where represents the marginal private cost of production and represents the marginal private benefit from consumption. Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and lakes, causing substantial environmental damage. Assume that represents the marginal social cost of producing toilet paper (incorporating the externality). What could the government do to internalize the externality?
In the presence of a negative externality, the government
could (1) toilet paper production.
In particular, the government should set a Pigovian tax of $ per ton of toilet paper produced.
0 100 200 300 400 500 600 700 800 900 1000 0
Quantity (1000 tons of toilet paper produced per week) Pr
ile t p
2. What is marginal benefit? What is marginal cost? Cite three examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.
3. Two solutions to carbon pollution reduction has been offered: 1) Cap and trade – states cap the amount of CO2 thats “acceptable” and they issue permits to pollute which the businesses have to buy from the state if they need to pollute. Those permits are tradable in open market. 2) Carbon tax: you will be taxed per unit of the CO2 that you release in the atmosphere. Discuss the pros and cons of each of these proposed solutions. Which do you prefer more? Why? Draw a graph to show the effects.
(1) surplus shortage
Consider the market for gasoline, illustrated in the figure to the right.
The equilibrium quantity of gasoline is million gallons (enter a numeric response using a real number rounded to two decimal places) and the equilibrium price is $ per gallon.
If instead the market price were $ , then there would be a
(1) of million gallons.
3 6 9 12 15 18 21 24 27 30 0.00
Quantity of Gasoline (gallons in millions)
5. Over the past few years, the supply of oil and gas has been increasing because of various technological advancements. However, because of the COVID-19 pandemic, the demand for oil and gas has decreased dramatically since there has been less far fewer cars on the road, less air traffic, and less production. Using your understanding of supply and demand, explain what is likely to happen to the equilibrium price and quantity of oil and gas because of these two events. Be sure to graph the supply and demand showing the before and after curves- and before and after equilibrium points.
6. Suppose that the mayor of New York abolishes rent control. A friend of yours who lives in New York complains about the higher apartment rents that result. This friend has never taken an economics class. Explain to your friend why the apartment market is now more efficient because rent control has been abolished. In your analysis, be sure to reference consumer surplus, producer surplus, and deadweight loss while rent control was in place and after it was abolished by referencing the areas in the figure.
Quantity (apartments per month)
t ( do
E F G
I J K
Qs QdQ *
7. Explain why minimum wage law is an example of price floor. What needs to happen for the equilibrium wage to rise absent minimum wage law? Make sure to draw a graph to support your answer.
(1) factor product
(2) demands supplies
(3) supplies demands
(4) product factor
(5) demand supply
(6) demands supplies
(7) product factor
(8) demands supplies
(9) demands supplies
(10) factor product
(11) demands supplies
(12) supplies demands
Identify whether each of the following transactions will take place in the factor market or in the product market and whether households or firms are supplying the good or service or demanding the good or service.
George buys a Tesla Model S.
This takes place in the (1) market.
The household (2) the good and the firm (3) the good.
Tesla increases employment at its Fremont plant.
This takes place in the (4) market.
The households (5) the labor and the firm (6) the labor.
George works 20 hours per week at McDonald’s.
This takes place in the (7) market.
The household (8) the labor and the firm (9) the labor.
George sells land he owns to McDonald’s so it can build a new restaurant.
This takes place in the (10) market.
The household (11) the factor of production and the firm (12) the factor of production.