Download ECO 321 Practice Final and more Exams Economic policy in PDF only on Docsity!
Economics 321
SAMPLE FINAL EXAM
Helen Schneider
Spring 2015
Student Name: ______________________________________________________
INSTRUCTIONS
1. There are three sections in this exam.
2. ANSWER ALL QUESTIONS. TOTAL POINTS = 100
3. Part I: 20 multiple choice questions(1 point each)
Part II: 4 true/false questions (5 points each)
Part III. 2 problems (10 & 40 points)
Part IV. Brief discussion question (10 points)
4. Read all questions carefully.
5. Write legibly and remember to LABEL ALL GRAPHS.
6. Total time = 3 hours.
GOOD LUCK
Part I. Multiple Choice. Do the following 20 multiple choice questions: Read each question carefully and CIRCLE the best answer. THERE IS ONLY ONE ANSWER TO EACH QUESTION.
- Which is not necessarily true of a public good? a) It costs nothing to let an additional person consume it. b) It costs a lot to keep an additional person from consuming it. c) It is always supplied by the public sector. d) All of the above.
- Pam and Kunal are the only members of a community that is trying to determine how much of the public good should be produced. Suppose that Pam is willing to pay $10 for the 4th^ unit of the public good while Kunal is willing to pay $7 for it. The marginal cost of producing the public good is constant at $4. Which of the following is true? a) Fewer than 4 units of the public good should be produced. b) More than 4 units of the public good should be produced. c) Exactly 4 units of the public good should be produced. d) In Lindahl equilibrium Pam and Kunal will share the cost of the public good equally. e) Both b and d are correct.
- Which of the following are barriers faced by governments in attempting to solve the problem of efficient public good provision? a) Individuals may not know their valuation of the good. b) Individuals may not reveal their valuation of the good to government. c) The government may not be able to put together preferences of many citizens. d) All of the above are correct. e) Both b and c are correct.
- Suppose that elementary education creates a positive externality. If the government does not subsidize education, then a) the equilibrium quantity of education will be equal the socially optimal quantity of education. b) the equilibrium quantity of education will be greater than the socially optimal quantity of education. c) the equilibrium quantity of education will be less than the socially optimal quantity of education. d) There is not enough information to answer the question.
- Which of the following implies that smoking causes a positive externality? a) Employers lower all wages to account for less productive workers. b) Smokers die too early to collect Social Security benefits. c) Insurance companies adjust house insurance premiums for smoking status. d) Both a and b are correct. e) None of the answers is correct.
- Marginal damages a) must always be considered in marginal social costs b) must always be considered in marginal private costs c) must not be considered in social marginal costs d) must always be considered in marginal private benefit
- Which of the following statements is true when there is a deadweight loss caused by a tax? a) Some efficient trades are not being made. b) Some inefficient trades are being made. c) The extent to which there is a deadweight loss is determined by the extent to which consumers and producers change their behavior to avoid the tax. d) Answers a, b, and c are true. e) Both a and c are true.
- Horizontal equity incorporates the notion that a) those earning higher incomes should pay more in taxes. b) those earning equal incomes should pay the same in taxes. c) taxes paid should be unassociated with income levels. d) there should be no excess burden created by a tax.
- The Haig-Simons definition of income includes a) social security benefits. b) welfare benefits. c) unrealized capital gains. d) annual rental value of owner-occupied housing e) all of the above.
- Which of the following preexisting distortions would cause the deadweight loss of a tax to be smaller than it would otherwise be? a) a positive consumption externality b) a negative production externality c) monopoly d) Answers a, b, and c are correct. e) Both a and c are correct.
- The substitution effect from an increase in wages is evident in a) a decrease in labor demand. b) a desire to consume less leisure. c) a desire to consume more leisure. d) a backward-bending (downward sloping) labor supply curve.
- Capital gains are a) treated exactly like other sources of income. b) taxed differently than other sources of income. c) generally not associated with a “lock-in effect.” d) only realized at death. e) none of the above.
- Depreciation allowances used in corporate taxation do which of the following? a) lower the marginal benefit of the investment in each period b) lower the cost of each dollar of the investment in each period c) increase the cost of each dollar of the investment in each period d) Both a and b are correct. e) Both a and c are correct.
Part II. True/False/Uncertain Questions. No credit will be given for answers without explanations.
From a general equilibrium point of view, ala' Harberger (the simple two-sector general equilibrium model presented in class), a tax on capital used in the corporate sector will increase prices in both corporate and unincorporated sectors.
False.
Price in corporate sector will increase, but since capital moves from corporate sector to unincorporate Sector, cost of capital decrease and so that prices decrease
Suppose we know that at the existing status quo allocation of the private good (x) and public good (G) in an economy with only these two goods: MRSAbexG = MRSBettyxG = MRTxG =10. This allocation is not Pareto efficient since too much of G is produced. (Note: x is the “vertical” good and G is the “horizontal” good.)
There is a public good, so MRS+MRS=20, their WTP, which is more than 10. Allocation is not Pareto efficient and G is now under-produced.
Part III. Problems. Read both problems carefully and answer all questions.
- Consider highway improvement project A that has the following costs and benefits: Project A period 0 period 1 period 2 period 3 benefits 0 1000 1000 1000 costs 2700 0 0 0
a. Should the project be undertaken if the discount rate is 4%? Show your work.
PV(b) = 1000/1.04 + 1000/1.04^2 + 1000/1.04^3 = 2775.
PV(c) = 2700
PV(b) > PV(c), so pursue the project
b. Suppose some of the benefits of the project are due to a reduction in highway fatalities. Suggest at least two methodologies for valuing a human life.
Revealed preference (based on compensating differential) PV(Future Wage) Contingent Valuation (based on survey)
- Jennifer lives in two periods, earning $30,000 in after-tax income in period one, during which she consumes and saves for period two. What is saved earns interest of 8% per year.
a. Sketch Jennifer’s inter-temporal budget constraint in period one/period two consumption space. If Jennifer’s level of consumption in period one is $10,000, what is the implied level of consumption in period two?
b. Suppose that interest income is now taxed at 30%. Sketch Jennifer’s inter-temporal budget constraint with and without the tax. Will Jennifer save less after the tax on interest is introduced?
IV. Brief Discussion Question
Define the Ramsey Rule. Discuss the equity implications of the Ramsey rule for optimal commodity taxation. How can these equity issues be addressed, if at all?
dDWL(i)/dR(i) = Lamda
T(x)/T(y) = Elasticity(y)/Elasticity(x) More inelastic commodities (goods) should be taxed higher
-1<x<1 inelastic 1>x elastic 1=x unit elasticity 0=x perfectly inelastic
