Economics 381/Environmental Studies 312 Review Assignment

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1 Economics 381/Environmental Studies 312 Review Assignment This Review Assignment is worth 5% of your grade. The purpose of this part of the assignment is twofold. First, it is designed to help you recall some key concepts from micro principles that will be important in Econ 381/ES 312. Second, it will provide me with valuable feedback about your recall of such material, and allow me to adjust the course material accordingly. In my estimation, this assignment should not take more than a couple of hours to complete. A note to transfer students. Depending on where you took micro principles, some of this material may not be familiar to you. Do your best to work through the assignment nonetheless, and feel free to ask your classmates or me for help. A note to all students. Feel free to work on this material with others. In this, however, I ask that you respect the University s polices on academic integrity. There is a fine line between working with others and cheating: make sure you stay on the right side of it. Any of you can ask me for help and hints with this assignment, but I will not directly provide you with the answers. I will put bubble sheets in an envelope on the noticeboard outside my office door. Please submit your answers on one of these bubble sheets (no xeroxes/photocopies - only original bubble sheets can be read by the grading scanner). The assignment is due at 5pm on Friday January 15. Put your completed bubble sheets in the relevant assignment box outside the Economics Office in the Business and Economics building. 1. What is your major (declared or intended)? a) Economics. b) Environmental Studies. c) Business/Commerce. d) Other. 2. What year are you in? a) First. b) Second. c) Third. d) Fourth. e) Other.!1

2 3. Did you take Econ 103 at UVic? (If yes, please skip to question 5. If no, continue with question 4.) 4. (Only answer this question if you answered no to question 3.) Which of the following most accurately describes your circumstances? a) I received transfer credit for 103 from Camosun College. b) I received transfer credit for 103 from an institution in BC other than Camosun College. c) I received transfer for 103 from a Canadian institution outside BC. d) I received transfer credit from an institution in a country other than Canada. e) Other. 5. How long has is been since you took Econ 103 (or equivalent)? a) Less than a year. b) Between one and two years. c) Between two and three years. d) More than three years. 6. To the best of your memory, have you cover the topic of externalities in any econ class that you have taken? 7. To the best of your memory, have you cover the topic of public goods in any econ class that you have taken? 8. Have you taken Econ 203?!2

3 9. Have you taken Econ 313? 10. Have you taken Econ 312? 11. Have you taken Econ 325? 12. Have you taken any University or College level statistics classes? 13. Have you taken any University or College level environmental studies classes? 14. Have you taken any University or College level science classes in which you studied climate change? 15. Have you taken any University or College level classes in which you used calculus?!3

4 16. Which of the following statements about opportunity cost is TRUE? I. Opportunity cost is equal to implicit costs plus explicit costs. II. Opportunity cost only measures direct monetary costs. III. Opportunity cost accounts for alternative uses of resources such as time and money. a) I, II and III. b) I c) III only. d) I and III only. 17. The demand curve for a good is derived from the: a) Marginal cost of the good. b) Marginal benefit of the good. c) Marginal benefits of the good minus marginal costs of the good. d) Production possibilities frontier. 18. The supply curve for a good is derived from the: a) Marginal cost of the good. b) Marginal benefit of the good. c) Marginal benefits of the good minus marginal costs of the good. d) Demand curve for that good. 19. Consumer surplus is equal to: a) Revenue received for a good minus that good s cost of production. b) The amount of money a consumer is willing to pay for a good. c) The opportunity cost of a good. d) None of the above.!4

5 20. Which of the following accurately defines producer surplus? a) Producer surplus equals total revenue minus variable costs. b) Producer surplus is equal to the amount that a seller receives for selling a given level of output, minus the minimum amount that the seller needs to receive in order to be willing to sell that level of output. c) Producer surplus equals profits plus fixed costs. d) All of the above accurately define producer surplus. 21. Which of the following statements about efficiency is/are FALSE? I. If, given some current situation, we are able to implement a change that makes everyone better off, then the current situation is efficient. II. A situation is inefficient, if we are unable to make one person better off without making anyone else worse off. III. A situation is efficient only if everyone has equal amounts of all goods. a) I only. b) III only. c) I and II only. d) I, II and III. 22. Suppose that - at a given level of an economic activity - marginal social cost is equal to marginal social benefit. Which of the following statements is TRUE? I. Social surplus is maximized. II. Social benefits equal social costs. III. Marginal social surplus equals zero. a) I, II and III. b) I c) III only. d) I and III only.!5

6 23. If, at a given level of output, marginal social benefit is greater than marginal social costs, then: a) Social surplus will increase if quantity increases, since social costs fall and social benefits rise. b) Social surplus will increase if quantity increases, since social benefits rise by more than social costs rise. c) Social surplus will increase if quantity decreases, since social benefits fall by less than social costs fall. d) Social surplus will increase if quantity decreases, since social benefits rise and social costs fall. 24. Which of the following statements about the economic incidence of taxation is TRUE? I. If demand is elastic, producers will bear a greater burden of the tax than consumers. II. If supply is perfectly inelastic, producers will bear all the burden of the tax. III. If the supply curve is perfectly elastic, consumers will bear none of the burden of the tax. a) II only. b) I and II only. c) II and III only. d) I, II and III. 25. Suppose that the introduction of government policy INCREASES social surplus. Which of the following statements is TRUE? I. The policy must represent a Pareto Improvement. II. The policy must represent a Potential Pareto Improvement. III. The gains from the policy outweigh the losses from the policy. a) II only. b) I and II only. c) II and III only. d) I, II, and III.!6

7 ! 26. Which of the following statements about external costs is true? a) Economics uses the term external cost to describe a spillover effect from market activity that is too small to matter to society. b) Economics ignores the environmental impact of market activities by calling such impact an external cost. c) Economics does not provide guidance for environmental policy since its treats any environmental cost as an external cost. d) None of the above statements are true. 27. Which of the following statements about negative externalities is/are TRUE? I. At the social-surplus maximizing level of output, external costs equal zero. II. At the unregulated competitive equilibrium, marginal social cost is greater than marginal social benefit. III. At any output level, social costs are greater than private (market) costs. a) I, II, and III. b) II only. c) III only. d) II and III. Questions refer to the diagram below, which illustrates the market for a good whose production results in a negative externality. $ MSC a d MPC b e MSB Q2 Q1 Q!7

8 28. If there is no regulation in place to correct the externality, which area represents MARKET SURPLUS? a) a. b) a - d. c) a + b. d) a + b + e. 29. If there is no regulation in place to correct the externality, which area represents SOCIAL SURPLUS? a) a. b) a - d. c) a + b. d) a + b + e. 30. If there is no regulation in place to correct the externality, which area represents EXTERNAL COSTS? a) b. b) b + e. c) b + e + d. d) e + d. 31. If there is no regulation in place to correct the externality, which area represents the DEADWEIGHT LOSS? a) d. b) e. c) d + e. d) There is no deadweight loss. 32. If there is a tax is introduced in this market that internalizes the externality, in the new taxed equilibrium, which area represents the DEADWEIGHT LOSS? a) d. b) e.!8

9 c) d + e. d) There is no deadweight loss. 33. If there is a tax is introduced in this market that internalizes the externality, in the new taxed equilibrium, which area represents SOCIAL SURPLUS? a) a. b) a - d. c) a + b. d) a + b + e. 34. If there is a tax is introduced in this market that internalizes the externality, in the new taxed equilibrium, which area represents EXTERNAL COSTS? a) b. b) b + e. c) b + e + d. d) There are no external costs. Questions 35 and 36 refer to the diagram below, which illustrates the supply and demand curves for a perfectly competitive market. Assume that each unit of output results in a marginal external cost of $5. $ D S Q!9

10 35. In the absence of government intervention, what will the deadweight loss equal? a) $0. b) $30. c) $60. d) None of the above. 36. If the socially optimal Pigovian tax is is introduced (the tax that internalizes the externality), what will be the price that consumers pay? a) $4. b) $5. c) $6. d) $7. Questions refer to the diagram below, which illustrates two firms marginal abatement cost curves for a pollutant P. Note that in the absence of any regulation each firm will emit 80 units of P.!10

11 ! $ MC A MC A P 37. If the marginal private benefit of emissions reduction is zero for each firm, and if there is no policy in place to ensure emissions reductions, then how much will each firm emit? a) P1 = 0; P2 = 0. b) P1 = 16; P2 = 8. c) P1 = P2 = 80. d) There is insufficient information to determine the level of emissions. 38. If an emissions tax of $6/unit is introduced, how much will each firm optimally emit in the taxed equilibrium? a) P1 = 0; P2 = 0. b) P1 = 40; P2 = 0. c) P1 = 50; P2 = 20. d) P1 = 60; P2 = If an emissions tax of $6/unit is introduced, how much tax will each firm pay, given its equilibrium level of emissions under the tax?!11

12 a) Each firm will pay $480. b) Firm 1 will pay $300; Firm 2 will pay $120. c) Firm 1 will pay $150; Firm 2 will pay $60. d) Firm 1 will pay $90; Firm 2 will pay $ If an emissions tax of $6/unit is introduced, how much abatement cost will each firm pay, given its equilibrium level of emissions under the tax? a) Firm 1 will pay $90; Firm 2 will pay $180. b) Firm 1 will pay $180; Firm 2 will pay $360. c) Firm 1 will pay $640; Firm 2 will pay $320. d) Each firm will pay zero in abatement cost. 41. If we wish to reduce aggregate emissions to 100 units at least cost, how much ABATEMENT should each firm undertake? a) Each firm should ABATE 30 units. b) Firm 1 should ABATE 20 units and firm 2 should ABATE 40 units. c) Firm 1 should ABATE 40 units and firm 2 should ABATE 20 units. d) Firm 2 should undertake all the ABATEMENT, since its marginal abatements costs are lower than those of firm Suppose a cap and trade program is introduced to reduce aggregate emissions to 130 units. If each firm receives HALF the permits in the initial allocation, then which firm will sell permits and which firm will buy? a) Firm 1 will sell permits and firm 2 will buy permits. b) Firm 1 will buy permits and firm 2 will sell permits. c) We need to know the number of permits in total, in order to figure out who will sell and who will buy. d) We need to know the equilibrium price of permits, in order to figure out who will sell and who will buy.!12

13 43. Suppose a cap and trade program is introduced to reduce aggregate emissions to 130 units. What will be the equilibrium price of permits, irrespective of the initial allocation of permits? a) We cannot determine the equilibrium price without knowing the initial allocation of permits. b) The equilibrium price of permits will be $6. c) The equilibrium price of permits will be $4. d) The equilibrium price of permits will be $ Suppose a cap and trade program is introduced to reduce aggregate emissions to 130 units. What each firm s emissions be once the permit market is in equilibrium? a) We cannot determine the equilibrium emissions without knowing the initial allocation of permits. b) P1 = 70; P2 = 60. c) P1 = 60; P2 = 40. d) P1 = 40; P2 = 0.!13