ECON 2100 Exam 1

True or False? Economists use models to test theories about economic relationships and make predictions about behavioral and institutional reactions to changes in market conditions.

True

At a fundamental level, pollution is the result of production and consumption decisions made by
A. both households and firms
B. neither firms nor individuals
C. firms
D. individuals

Both households and firms

A circular flow model involves flows of economic activity through
A. factor and output markets
B. factor market
C. neither factor nor output markets
D. output market

Factor and output markets

In the Materials Balance Model, an increase in population (holding all else constant) will lead to ____ extraction of natural resources. Pick the answer choice that best fits.
A. lesser
B. no change
C. greater
D. can't be determined

Greater

In the Materials Balance Model, by recycling, it is possible to prevent the flow of residuals back into nature?
A. True
B. False
C. Maybe
D. Don't know

False

Anthropogenic pollutants (resulting from human activity) are of ____ concern for environmental economics compared with natural pollutants.

Greater

Allocative efficiency
A. is not relevant to environmental policy.
B. calls for the equality of additional benefits and additional costs.
C. is automatically achieved when cost-effectiveness is achieved.
D. requires that the total costs to society linked to environmental policy are equivalent to the associated total benefits.

Calls for the equality of additional benefits and additional costs.

Environmental Economics
A. is concerned mainly with the residual flow from economic activity back to nature.
B. focuses on the flow of resources from nature to economic activity.
C. recognizes that the flow of residuals back to nature is completely preventable.
D. none of these.

Is concerned mainly with the residual flow from economic activity back to nature.

According to the second law of thermodynamics

Nature's capacity to convert matter and energy is limited.

Acid rain (Acidic deposition) is an example of
A. global pollution
B. regional pollution
C. local pollution
D. natural pollution

Regional Pollution

A coal based power generation plant is an example of _____ of pollution.
A. a stationary source
B. a mobile source
C. a nonpoint source
D. none of the above

A stationary source

The National Environmental Protection Act (NEPA) of 1969
A. calls for Environmental Impact Statements (EIS) on major legislative proposals
B. directs integration of environmental tasks among federal agencies
C. guides all environmental policy formulation in the United States
D. all of the above

All of the above

If the consumption of a good by one consumer reduces the availability of that good for consumption by another consumer, and the benefits of consumption of that good are non exclusive to a consumer then such a good is a private good.
True or False

False

A change in demand for a good is the result of a change in the (current) price of that good.

False

Consider the following demand equation for an individual:
qd=10-0.5P
where qd,P are quantity demanded(lbs) and current price($/lb) of an item, respectively. If the price of this item goes up by $1, then quantity demanded of the item decreases by

(0.5,.5)

Circular Flow Model

Shows the real and monetary flows of economic activity through the output and factor markets

Materials Balance Model

Places the circular flow within a larger schematic to show links between economic activity and the natural environment
-Flow of resources from the environment to the economy
-Flow of residuals(pollutants) from the economy to the environment

Science & Material Balance Model

The flow of resources and residuals are balanced according to laws of science
- 1st Law of Thermodynamics: matter and energy can neither be created nor destroyed
- 2nd Law of Thermodynamics: nature's capacity to convert matter and energy is not without bound

Natural Pollutants

Arise from non-artificial processes in nature (ocean salt spray, pollen)

Anthropogenic Pollutants

Human induced and include all residuals associated with consumption and production (chemical wastes, gases from combustion)

Sources of Pollution

Sources grouped by mobility
- stationary sources: fixed site
- Mobile sources: any nonstationary source
Sources grouped by identifiability
- Point source: single identifiable
- Nonpoint Source: unidentifiable source

Economic Analysis

Uses models to explain strategic decision making and underlaying economic conditions

If qs=8p-2 is the supply equation for an item where qs, p are the quantity supplied and price, respectively, of that item. Then the inverse supply equation associated with this item is

B. p = qs/8 + 2/8

The market demand and supply equations for an item, respectively, are as follows:
Qd = -10P+20
Qd =32P-8
Then the equilibrium price (PE) is

28/42

The market demand and supply equations for an item, respectively, are as follows:
Qd = -10P+20
Qd =32P-8
Then the equilibrium quantity (QE) is

13.334

The market demand and supply equations for an item, respectively, are as follows:
Qd=200-4P
Qs =100
Then the equilibrium quantity (QE) is

100

The market demand and supply equations for an item, respectively, are as follows:
Qd=200-4P
Qs =100
Then the equilibrium price (PE) is

25

Allocative efficiency is achieved when

marginal benefit equals marginal cost

Suppose the market for electricity is an equilibrium, if there is a decrease in supply of electricity (all else constant), how would this impact the equilibrium price and quantity.

Increase price but decrease quantity

Suppose the market for electricity is an equilibrium, if there is an increase in demand for electricity (all else constant), how would this impact the equilibrium price and quantity.

Increase both

Excess demand occurs when

Quantity demanded exceeds quantity supplied

Suppose market demand equation is given as Qd=100-4P where Qd, P are quantity demanded (units) and price ($/unit), respectively of an item. The consumer surplus($) when P=$10 is ___. Do not use the $ sign or decimals in your answer. You will not receive credit if you do so.

450

If the following is the demand equation for an item:
qd=10-5P
where qd, P , respectively, are the quantity demanded (lbs) and current price($/unit) of an item then its inverse demand equation is

C. P =-0.2qd + 2

Horizontal summation of individual demand values can be used to derive the market demand for ____ goods.

Private

For a public good, the quantity of the good that is available to all is _____.

The same

A pure private good is one whose benefits are excludable but consumption of which is nonrival.

False

When a negative production externality is generated, then the Marginal Social Cost

Is equal to Marginal Private Cost plus Marginal External Cost

Assume that production level (Q) is 100 units. If the marginal external cost (MEC) and marginal social cost (MSC) of production, respectively are
MEC=.05Q, MSC=10+.125Q
Then, the Marginal Private Cost (MPC) at Q=100 is

17.5

Following are the demand estimates for an air filtration system in two districts-1,2, respectively, of a town
District 1: Q = 160 - 20p1
District 2: Q = 60 - 10p2,
where Q is the expected percent of a pollutant to be filtered by the system, and p is the price in millions of dollars.
Determine the town's market demand for this public good.

P = -.15Q + 14

Market demand curve for a private good can be obtained by a vertical summation of individual demand curves for that good.

False

A competitive equilibrium in the presence of a negative production externality for a good will lead to overproduction of that good because the market ignores the cost associated with the externality.

True

A producer releases chemical waste into a stream. The negative effects are not captured by the private market leading to a market failure.
Suppose Q is the amount of chemical waste in thousands of barrels, and P is the price per barrel. The marginal social benefit (MSB), marginal private cost (MPC), and marginal external cost (MEC), respectively are
MSB=70-0.3Q,
MPC=10+0.5Q,
MEC= 0.2Q
The competitive equilibrium quantity and price, respectively are.

75, 47.50

A pure public good is one that is nonrival in consumption but whose benefits are excludable in nature.

False

Market failure results when the assumptions of a fully functioning market are violated.

True

For the Coase Theorem, to lead to an efficient solution even when property rights are properly defined, transactions must be costly.

False

When an externality occurs, a third party is impacted by production or consumption of a good.

True

A producer releases chemical waste into a stream. The negative effects are not captured by the private market leading to a market failure.
Suppose Q is the amount of chemical waste in thousands of barrels, and P is the price per barrel. The marginal social benefit (MSB), marginal private cost (MPC), and marginal external cost (MEC), respectively are
MSB=70-0.3Q ,
MPC=10+0.5Q,
MEC=0.2Q
The efficient (social) equilibrium quantity and price, respectively are.

60, 52

Suppose the inverse demand curves (for a public good) for two consumers are given as follows.
Consumer 1: p1=10-0.5 QD
Consumer 2: p2=15-0.5QD
where p1, p2 are the demand prices ($/unit) or willingness to pay for the two consumers, respectively.
Then the market demand curve for this public good is given as P=25-2QD

False

When a negative externality occurs, it generates a cost on the third party.

True

"Rivalry" in consumption means that:

consumption by one person precludes that of another

Excludability

Benefits of consumption are exclusive to that single consumer. Ex. one person getting to eat a specific apple only they get to eat it.

A market is defined by 3 things

1. Product that us bough and sold such as bananas or oranges.
2. Location such as city or internet.
3. Point in time such as March 1, 2010

What is demand?

The quantity of a good that the consumer is willing and ale to buy a set of prices during a time period.

What is demand price?

The willingness to pay for a good.

What is supply?

The amount of good that the producer is willing and able to offer in the market during a time period.

Find the inverse of this demand equation.
qd = -2P + 4

Step 1. qd-4/ -2
Ans
= -.5qd +2

Law of Supply

The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied by producers increases, and as the price decreases, the quantity supplied decreases.