ECONOMICS 4316/7316 Problem Set #2
TRUE OR FALSE (no explanation necessary)
For questions 1 – 5, consider the Edgeworth-Bowley box below. Assume the markets for goods X
and Z are competitive.
1. (3) Point a is Pareto efficient.
2. (3) Point b is Pareto efficient.
3. (3) Point c is Pareto efficient.
4. (3) There must be a Pareto efficient bundle somewhere on indifference curve U.
5. (4) Assume point d is Pareto efficient and Peppa and George have initial endowments (maybe
an inheritance from Papa Pig and Mommy Pig) they each use to purchase some bundle of X and Z
that land the them at point b (they spend all of their endowments). Out of fairness, perhaps, we
take income away from George and gave it to Peppa. The eventual result will be a Pareto
efficient outcome.
SHORT ANSWER
Consider a competitive market for COVID-19 vaccines below.
George
Pig
Peppa
Pig
Z
X
a
c
U
d
$8 MC = MPC = MSC
MPB
1,200
$
Q1,500
$6
MSB
$a
c
d
ef g
ECONOMICS 4316/7316 Problem Set #2
6. (4) What is the equili
ium quantity of vaccines purchased/sold in a free market (no
government intervention) (number)? ____________
7. (4) What is the socially optimal quantity of vaccines purchased/sold (number)? ____________
8. (4) What is the marginal external benefit (in $)? ____________
9. (3) What is the value of x (in $)? ____________
XXXXXXXXXXWhat is the net benefit to society (letters)? ____________
XXXXXXXXXXExtra Credit) What is the net benefit to society (in $)? ____________
XXXXXXXXXXThe two characteristics associated with public goods are that they are ____________ and
____________.
Consider the following table, which shows the marginal benefit of three quantities of a public
good for four individuals in Mizzouvania.
Marginal Benefits at Each Quantity of Public Good (measured in $)
Individual Q1 Q2 Q3
John $1 $2 $3
Jacob $4 $5 $6
Jingle Heimer $5 $7 $9
Smith $2 $4 $6
XXXXXXXXXXSuppose MC = $12. What is the optimal quantity of the public good (which Q)?
__________.
XXXXXXXXXXSuppose the socially optimal choice of public good is Q3. What is the marginal cost of the
public good at that quantity (in $)? ____________
XXXXXXXXXXRichard Musgrave’s vision of the public sector had three
anches, which are
____________, ____________, and ____________.
XXXXXXXXXXOf the three
anches, one most certainly should be within the purview of the national
government. That is the _____________
anch.
ECONOMICS 4316/7316 Problem Set #2
Consider the market below, which is a regulated (by the local government) utility.
XXXXXXXXXXThis market would be considered a ____________.
XXXXXXXXXXThe socially optimal level of productions is (which Q)? ____________
XXXXXXXXXXThe
eak-even price is (letter) ____________.
XXXXXXXXXXThe loss associated with the optimal level of production is given by (letters)
____________ (if there is no loss, write “zero”)
XXXXXXXXXXAn example of a local public good is __________.
XXXXXXXXXXAn example of a negative externality is ____________.
XXXXXXXXXXInspired by your State and Local Public Finance class, you take a job at the World Bank
doing intergovernmental relations. You visit a country that seeks to decentralize its government.
The three key decisions to be made are _______________. _______________, and
_______________.
XXXXXXXXXXAccording to Wallace Oates “decentralization theorem,” public swimming pools should
e provided by the (local, state, federal) government ____________.
ATC
MCa
P
Q2
D = MB
Q1
c
d
e
f