Deck 35: A: Externalities

Question 1

If your consumption of toothpaste produces positive externalities for your neighbors (which you ignore),then you are consuming less toothpaste than is Pareto optimal.

Answer 1

True

Question 2

Two stores are located side by side and attract customers to each other and to themselves by advertising.Where x₁ and x₂ are the advertising expenditures of stores 1 and 2,the profits of the firms are (48 + x₂)x₁ - 2(x₁)² for store 1 and (54 + x₁)x₂ -2(x₂)² for store 2.Knowing these functions,one investor buys both stores.In order to maximize his total profits,how much should he spend on advertising for store 1?

A) $10
B) $26
C) $25
D) $35
E) None of the above.

Answer 2

$25

Question 3

The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their neighbors' campfires.Each camper's utility function is U = 17f - f ² -s,where f is the number of hours her own campfire burns per day and where s is the amount of smoke in the air.It happens that s is 7 times the average amount of hours that campers use their fires.The campground authority could make all campers better off by limiting the number of hours of campfire per day for everyone.How many hours of campfire per day should the authority allow each camper in order to make the typical camper as well off as possible?

A) 3
B) 6
C) 8.50
D) 5
E) Campers will be best off if they are free to choose their own amounts of campfire.

Answer 3

5

Question 4

Mike's utility function is U(c,d,h)=8c + 12d -d² - 6h,where d is the number of hours per day that he spends driving around,h is the average number of hours per day spent driving around by other citizens of his town,and c is the amount of money he has to spend on other things than gasoline and auto repairs.There are 1,001 identical citizens in Mike's home town.Mike's expenses for gasoline and auto repairs amount to $.50 per hour for the time he spends driving.If Mike believes that his amount of driving won't affect the amount that others drive,how many hours per day will he choose to drive?

A) 4
B) 6
C) 8
D) 2
E) 1

Question 5

A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollution detection by the government.

Question 6

Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious gas vapors per day at its Torrance,California,refinery.This suggests that allowing pollution rights to be marketed is likely to lead to more pollution than there would be if there were no restrictions on polluting.

Question 7

The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their neighbors' campfires.Each camper's utility function is U=25f -f ² - s,where f is the number of hours her own campfire burns per day and where s is the amount of smoke in the air.It happens that s is 11 times the average amount of hours that campers use their fires.The campground authority could make all campers better off by limiting the number of hours of campfire per day for everyone.How many hours of campfire per day should the authority allow each camper in order to make the typical camper as well off as possible?

A) 5
B) 7
C) 12.50
D) 8
E) Campers will be best off if they are free to choose their own amounts of campfire.

Question 8

A mountain village owns a common pasture where villagers graze their goats.The cost to a goat owner of owning and caring for a goat is 4 groschens.The pasture gets overgrazed if too many goats share the pasture.The total revenue from all goats on the common pasture is f (g)=48g - 2g²,where g is the number of goats on the pasture.The town council notices that total profit from the pasture is not maximized if villagers are allowed to pasture goats for free.The council decides to allow a goat to use the common pasture only if its owner buys it a goat license.To maximize total profit (of villagers and council),how many groschens per goat should the council charge?

A) 12
B) 20
C) 24
D) 26
E) 22

Question 9

The "tragedy of the commons" refers to the tendency for common property to be overused.

Question 10

A small coffee company roasts coffee beans in its shop.The unroasted beans cost the company $2 per pound.The marginal cost of roasting coffee beans is $(150 -10q + q²)/100 per pound when q pounds are roasted.The smell of roasting beans imposes costs on the company's neighbors.The total amount that neighbors would be willing to pay to have the shop stop roasting altogether is 5q²,where q is the number of pounds being roasted.The company sells its output in a competitive market at $4.50 per pound.What is the socially efficient amount of coffee for the company to roast?

A) 10 pounds.
B) 15 pounds.
C) the square root of 10 pounds.
D) 45 pounds.
E) None of the above.

Question 11

A trade between two people is an example of an externality.

Question 12

The only known way to eliminate externalities is through taxes or subsidies.

Question 13

Firm 1 produces output x with a cost function c₁(x)=x²+ 10.Firm 2 produces output y with a cost function c₂(y,x)= y²+ x.Thus,the more that firm 1 produces,the greater are firm 2's costs.Both firms face competitive product markets.The competitive price of x is $20 and the competitive price of y is $40.No new firms can enter the industry and the old ones must remain.The efficient Pigouvian tax on the x good is

A) $0.
B) $1.
C) $2.
D) $3.
E) $4.

Question 14

The efficient amount of air pollution is in general independent of whether polluters or pollutees pay to reduce pollution.

Question 15

Two stores are located side by side.They attract customers to each other and to themselves by advertising.The profit functions of the two stores are (45 +x₂)x₁ -2x²₁ for store 1 and (90 + x₁)x₂ -2x²₂ for store 2,where x₁ and x₂ are total advertising expenditures by stores 1 and 2 respectively.If each store sets its advertising expenditures independently (as in Nash equilibrium),how much would store 1 spend on advertising?

A) $18
B) $20
C) $15
D) $23
E) None of the above.

Question 16

If there are negative externalities in production or consumption,competitive equilibrium is unlikely to be Pareto efficient but positive externalities enhance the efficiency of the market.

Question 17

If preferences are quasilinear,then the delineation of property rights has no distributional consequences.

Question 18

The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their neighbors' campfires.Each camper's utility function is U=22f - f ² -s,where f is the number of hours her own campfire burns per day and where s is the amount of smoke in the air.It happens that s is 10 times the average amount of hours that campers use their fires.The campground authority could make all campers better off by limiting the number of hours of campfire per day for everyone.How many hours of campfire per day should the authority allow each camper in order to make the typical camper as well off as possible?

A) 6
B) 11
C) 4
D) 7
E) Campers will be best off if they are free to choose their own amounts of campfire.

Question 19

Two stores are located side by side.They attract customers to each other and to themselves by advertising.The profit functions of the two stores are (45+x₂)x₁ -2x²₁ for store 1 and (75 + x₁)x₂ -2x²₂ for store 2,where x₁ and x₂ are total advertising expenditures by stores 1 and 2 respectively.If each store sets its advertising expenditures independently (as in Nash equilibrium),how much would store 1 spend on advertising?

A) $14
B) $19
C) $22
D) $17
E) None of the above.

Question 20

Two stores are located side by side.They attract customers to each other and to themselves by advertising.The profit functions of the two stores are (75 +x₂)x₁ -2x²₁ for store 1 and (105 + x₁)x₂ -2x²₂ for store 2,where x₁ and x₂ are total advertising expenditures by stores 1 and 2 respectively.If each store sets its advertising expenditures independently (as in Nash equilibrium),how much would store 1 spend on advertising?

A) $27
B) $29
C) $32
D) $24
E) None of the above.

Question 21

A clothing store and a jeweler are located side by side in a shopping mall.If the clothing store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the profits of the clothing store will be (36 +J )-2C ² and the profits of the jeweler will be (30 + C )J -2J ².The clothing store gets to choose its amount of advertising first,knowing that the jeweler will find out how much the clothing store advertised before deciding how much to spend.The amount spent by the clothing store will be

A) $17.
B) $34.
C) $51.
D) $8.50.
E) $25.50.

Question 22

An apiary is located next to an apple orchard.The apiary produces honey and the apple orchard produces apples.The cost function of the apiary is C_H(H,A)=H ²/100-1A and the cost function of the apple orchard is C_A(H,A)=A²/100,where H and A are the number of units of honey and apples produced respectively.The price of honey is $5 and the price of apples is $6 per unit.Let A₁ be the output of apples if the firms operate independently,and let A₂ be the output of apples if the firms are operated by a single owner so as to maximize total profit.

A) A₁= 300 and A₂ = 350.
B) A₁ = A₂ =300.
C) A₁ =175 and A₂ =300.
D) A₁= 150 and A₂ = 300.
E) A₁ =250 and A₂ =300.

Question 23

Mike's utility function is U(c,d,h)= 8c + 12d-d² - 6h,where d is the number of hours per day that he spends driving around,h is the average number of hours per day spent driving around by other citizens of his town,and c is the amount of money he has to spend on other things than gasoline and auto repairs.There are 1,001 identical citizens in Mike's home town.Mike's expenses for gasoline and auto repairs amount to $.50 per hour for the time he spends driving.If Mike believes that his amount of driving won't affect the amount that others drive,how many hours per day will he choose to drive?

A) 4
B) 8
C) 2
D) 6
E) 1

Question 24

A clothing store and a jeweler are located side by side in a shopping mall.If the clothing store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the profits of the clothing store will be (18+ J )C -2C ² and the profits of the jeweler will be (24 + C )J - 2J ².The clothing store gets to choose its amount of advertising first,knowing that the jeweler will find out how much the clothing store advertised before deciding how much to spend.The amount spent by the clothing store will be

A) $10.
B) $5.
C) $20.
D) $30.
E) $15.

Question 25

Marbella has 101 residents.All wear the same fancy clothes and each has the same utility function,u(m,b,B)=m + 14b - b² -B/50,where m is the amount of macaroni (in kilograms)that he or she eats per day,b is the number of hours that he or she spends on the beach per day,and B is the total number of person-hours spent per day on the beach by other residents of Marbella.Each has an income of $10 per day and macaroni costs $1 per kilogram.The city council is considering a law that would limit the amount of time that any person can spend on the beach.How many hours per day should they allow in order to maximize the utility of a typical Marbellite?

A) 6
B) 9
C) 10
D) 7
E) They could not possibly be made better off by legislation that limits their freedom to choose.

Question 26

An apiary is located next to an apple orchard.The apiary produces honey and the apple orchard produces apples.The cost function of the apiary is C_H(H,A)= H ²/100 = 2A and the cost function of the apple orchard is C_A(H,A)=A²/100,where H and A are the number of units of honey and apples produced respectively.The price of honey is $1 and the price of apples is $3 per unit.Let A₁ be the output of apples if the firms operate independently,and let A₂ be the output of apples if the firms are operated by a single owner so as to maximize total profit.

A) A₁ = 75 and A₂ = 150.
B) A₁ =A₂ = 150.
C) A₁=125 and A₂ = 150.
D) A₁ = 150 and A₂ =250.
E) A₁ =50 and A₂ = 150.

Question 27

An airport is located next to a housing development.Where X is the number of planes that land per day and Y is the number of houses in the housing development,profits of the airport are 36X - X² and profits of the developer are 42Y - Y² - XY.Let H₁ be the number of houses built if a single profit-maximizing company owns the airport and the housing development.Let H₂ be the number of houses built if the airport and the housing development are operated independently and the airport has to pay the developer the total "damages" XY done by the planes to the profits of the developer.

A) H₁=18 and H₂ = 20.
B) H₁ =21 and H₂ = 16.
C) H₁ =H₂ = 16.
D) H₁ =16 and H₂ = 21.
E) H₁ = 20 and H₂ =24.

Question 28

Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $4,000 per month.Suppose that if x lobster boats operate in the bay,the total monthly revenue from lobster boats in the bay is $1,000(28x -x²).If there are no restrictions on entry and new boats come into the bay until there is no profit to be made by a new entrant,then the number of boats who enter will be X₁.If the number of boats that operate in the bay is regulated to maximize total profits,the number of boats in the bay will be X₂.

A) X₁ =12 and X₂ =10.
B) X₁= 28 and X₂ = 16.
C) X₁ = 24 and X₂ = 12.
D) X₁ = 24 and X₂ = 24.
E) None of the above.

Question 29

An apiary is located next to an apple orchard.The apiary produces honey and the apple orchard produces apples.The cost function of the apiary is C_H(H,A)=H ²/100 -3A and the cost function of the apple orchard is C_A(H,A)=A²/100,where H and A are the number of units of honey and apples produced respectively.The price of honey is $2 and the price of apples is $7 per unit.Let A₁ be the output of apples if the firms operate independently,and let A₂ be the output of apples if the firms are operated by a single owner so as to maximize total profit.

A) A₁ = A₂ =350.
B) A₁ = 250 and A₂ =350.
C) A₁ = 175 and A₂ = 350.
D) A₁ = 350 and A₂ =500.
E) A₁ = 100 and A₂ =350.

Question 30

Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $4,000 per month.Suppose that if x lobster boats operate in the bay,the total monthly revenue from lobster boats in the bay is $1,000(28x-x²).If there are no restrictions on entry and new boats come into the bay until there is no profit to be made by a new entrant,then the number of boats who enter will be X₁.If the number of boats that operate in the bay is regulated to maximize total profits,the number of boats in the bay will be X₂.

A) X₁ = 24 and X₂ = 24.
B) X₁ = 28 and X₂ =16.
C) X₁=24 and X₂ = 12.
D) X₁ =12 and X₂ = 10.
E) None of the above.

Question 31

Marbella has 101 residents.All wear the same fancy clothes and each has the same utility function,u(m,b,B)= m + 24b - b² - B/50,where m is the amount of macaroni (in kilograms)that he or she eats per day,b is the number of hours that he or she spends on the beach per day,and B is the total number of person-hours spent per day on the beach by other residents of Marbella.Each has an income of $10 per day and macaroni costs $1 per kilogram.The city council is considering a law that would limit the amount of time that any person can spend on the beach.How many hours per day should they allow in order to maximize the utility of a typical Marbellite?

A) 12
B) 14
C) 11
D) 15
E) They could not possibly be made better off by legislation that limits their freedom to choose.

Question 32

Mike's utility function is U(c,d,h)=4c +14d - d ² - 6h,where d is the number of hours per day that he spends driving around,h is the average number of hours per day spent driving around by other citizens of his town,and c is the amount of money he has to spend on other things than gasoline and auto repairs.There are 1,001 identical citizens in Mike's home town.Mike's expenses for gasoline and auto repairs amount to $.50 per hour for the time he spends driving.If Mike believes that his amount of driving won't affect the amount that others drive,how many hours per day will he choose to drive?

A) 7
B) 8
C) 6
D) 3
E) 0.50

Question 33

An airport is located next to a housing development.Where X is the number of planes that land per day and Y is the number of houses in the housing development,profits of the airport are 28X - X² and profits of the developer are 20Y- Y²- XY.Let H₁ be the number of houses built if a single profit-maximizing company owns the airport and the housing development.Let H₂ be the number of houses built if the airport and the housing development are operated independently and the airport has to pay the developer the total "damages" XY done by the planes to the profits of the developer.

A) H₁ = H₂ = 4.
B) H₁ = 4 and H₂ = 10.
C) H₁ =10 and H₂ =4.
D) H₁ =6 and H₂ = 9.
E) H₁ =9 and H₂ =13.

Question 34

Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $4,000 per month.Suppose that if x lobster boats operate in the bay,the total monthly revenue from lobster boats in the bay is $1,000(12x - x²).If there are no restrictions on entry and new boats come into the bay until there is no profit to be made by a new entrant,then the number of boats who enter will be X₁.If the number of boats that operate in the bay is regulated to maximize total profits,the number of boats in the bay will be X₂.

A) X₁ = 8 and X₂ =8.
B) X₁ = 4 and X₂ = 2.
C) X₁ = 8 and X₂ = 4.
D) X₁ = 12 and X₂ = 8.
E) None of the above.

Question 35

Charlie's utility is U(c,d,h)= 4c + 10d - d ² - 4h,where d is the number of hours per day that he spends driving around,h is the number of hours per day spent driving around by other people in his home town,and c is the amount of money he has left to spend on other stuff besides gasoline and auto repairs.Gas and auto repairs cost $.50 per hour of driving.All the people in Charlie's home town have the same tastes.If each citizen believes that his own driving will not affect the amount of driving done by others,they will all drive D₁ hours per day.If they are all drive the same amount,they would all be best off if each drove D₂ hours per day,where

A) D₁ = 6 and D₂ = 3.
B) D₁ =7 and D₂ = 1.
C) D₁= D₂ = 4.
D) D₁= 4 and D₂ = 2.
E) D₁=4 and D₂ =0.

Question 36

Peter's utility is U(c,d,h)= 2c + 9d -d² -6h,where d is the number of hours per day that he spends driving around,h is the number of hours per day spent driving around by other people in his home town,and c is the amount of money he has left to spend on other stuff besides gasoline and auto repairs.Gas and auto repairs cost $.50 per hour of driving.All the people in Peter's home town have the same tastes.If each citizen believes that his own driving will not affect the amount of driving done by others,they will all drive D₁ hours per day.If they are all drive the same amount,they would all be best off if each drove D₂ hours per day,where

A) D₁ = 4 and D₂ =1.
B) D₁ = 7 and D₂ =0.
C) D₁ = 6 and D₂ = 2.
D) D₁ = D₂ =4.
E) D₁= 4 and D₂ = 0.

Question 37

A clothing store and a jeweler are located side by side in a shopping mall.If the clothing store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the profits of the clothing store will be (30 + J )C -2C ² and the profits of the jeweler will be (24 + C )J - 2J ².The clothing store gets to choose its amount of advertising first,knowing that the jeweler will find out how much the clothing store advertised before deciding how much to spend.The amount spent by the clothing store will be

A) $42.
B) $14.
C) $28.
D) $7.
E) $21.

Question 38

An airport is located next to a housing development.Where X is the number of planes that land per day and Y is the number of houses in the housing development,profits of the airport are 26X - X² and profits of the developer are 22Y - Y² - XY.Let H₁ be the number of houses built if a single profit-maximizing company owns the airport and the housing development.Let H₂ be the number of houses built if the airport and the housing development are operated independently and the airport has to pay the developer the total "damages" XY done by the planes to the profits of the developer.

A) H₁ =11 and H₂ = 6.
B) H₁ = H₂ = 6.
C) H₁ = 8 and H₂ =10.
D) H₁ = 6 and H₂ =11.
E) H₁ =10 and H₂ = 14.

Question 39

Peter's utility is U(c,d,h)= 8c+18d -d ² - 6h,where d is the number of hours per day that he spends driving around,h is the number of hours per day spent driving around by other people in his home town,and c is the amount of money he has left to spend on other stuff besides gasoline and auto repairs.Gas and auto repairs cost $.50 per hour of driving.All the people in Peter's home town have the same tastes.If each citizen believes that his own driving will not affect the amount of driving done by others,they will all drive D₁ hours per day.If they are all drive the same amount,they would all be best off if each drove D₂ hours per day,where

A) D₁ = 7 and D₂ = 4.
B) D₁ = D₂ = 7.
C) D₁= 9 and D₂ = 5.
D) D₁ = 10 and D₂ = 0.
E) D₁ = 7 and D₂ =2.

Question 40

Marbella has 101 residents.All wear the same fancy clothes and each has the same utility function,u(m,b,B)= m + 14b - b²-B/50,where m is the amount of macaroni (in kilograms)that he or she eats per day,b is the number of hours that he or she spends on the beach per day,and B is the total number of person-hours spent per day on the beach by other residents of Marbella.Each has an income of $10 per day and macaroni costs $1 per kilogram.The city council is considering a law that would limit the amount of time that any person can spend on the beach.How many hours per day should they allow in order to maximize the utility of a typical Marbellite?

A) 10
B) 7
C) 9
D) 6
E) They could not possibly be made better off by legislation that limits their freedom to choose.

Question 41

Two firms in a grimy Ohio town produce the same product in a competitive industry.Each has an old factory using an old technology.It still pays to operate these factories but it would not pay to expand them.The only variable factor used by either firm is labor.Each firm pollutes the other and thus reduces the output of the other firm.The production functions of firms A and B respectively are Q a = L .5 a (2/3)Q b and Q b =L .5 b (1/3)Q a,where L .5 a and L .5 b are the square roots respectively of the amount of labor used by firms A and B.The wage rate of labor is $1 and the price of the firms output is $12.
a.If the two firms each maximize profits independently,what is their total output and how much quasi-rents do their factories earn?
b.If someone buys them both and maximizes joint profits,how much quasi-rent is earned in total?

Question 42

Millie Bush has written a best-seller.Revenues net of production costs are $300T^1/3A^1/3,where T is the number of publicity trips Millie takes and A is the number of ads for the book that appear.Millie has to pay for all of her own publicity trips,which cost $100 each.Her publisher pays for the advertising,which costs $100 per ad.Revenues from the book are split equally between Millie and her publisher.Let T₁ be the number of trips that Millie would choose to make in a Nash equilibrium where she chooses the number of trips and the publisher chooses the amount of advertising.Let T₂ be the number of trips that Millie should make if trips and advertising are determined so as to maximize total profits net of trip and ad costs.

A) T₁ = 1 and T₂ =1.
B) T₁ = 1 and T₂ = 2.
C) T₁ = 2 and T₂ = 1.
D) T₁ = 1 and T₂ = 1/8.
E) T₁ =1/8 and T₂ = 1.