SOS 325 Midterm Exam Spring 2017 Answer all questions on this sheet of paper and turn in by the end of class on March 2nd. You may also submit your assignment via Blackboard, but it must be uploaded before the end of class on the 2nd. Do NOT email your problem set to me or the TA.

SOS 325 Midterm Exam Spring 2017 Answer all questions on this sheet of paper and turn in by the end of class on March 2nd. You may also submit your assignment via Blackboard, but it must be uploaded before the end of class on the 2nd. Do NOT email your problem set to me or the TA. Make sure that your answers are clear, legible, and concise. Multiple Choice (30 Points, 3 Points Each) 1. Moving from an economically inefficient to efficient allocation of resources will necessarily increase benefits by more than costs. (a) True (b) False 2. The marginal benefit of burning coal in a production process (the producer’s willingness to pay for its use) is 110 − 17Q. The marginal damage to the environment from burning coal is 150 + Q. The efficient amount of production (involving coal burning) is (a) 18 (b) 0 (c) 11 (d) None of the above 3. You read in the news that sales of gas-guzzling, high emissions SUVs fell dramatically in Arizona from 2011 to 2014, while sales of hybrid vehicles increased. From an economist’s perspective what is the most likely explanation? (a) Arizonans started liking SUVs less and hybrid cars more. (b) Drivers started to care about the external costs of their behavior and opted for low-emissions vehicles to reduce these costs. (c) The price of oil was extremely high and increasing from 2011 to 2014, making driving SUVs more expensive relative to hybrids, which consume less gas. (d) Average annual temperature in Arizona increased from 2011 to 2014, making hybrids more appealing. 4. The elasticity of demand for gasoline is likely to be higher for price changes lasting many weeks/months than for a change persisting for only a few days. (a) True (b) False 1 5. A new 20% tax on all imports from Mexico causes the price of guacamole to soar because imported avocados are now more expensive. All other things remaining the same, how will this affect the price of salsa? (a) It will raise the price of salsa because they are substitute products (b) It will lower the price of salsa because they are substitute products (c) It will raise the price of salsa because they are complement products (d) It will lower the price of salsa because they are complement products 6. Which of the following are examples of public goods? (a) Valley Metro (i.e. bus and light rail systems in Phoenix) (b) National Public Radio (c) A swimming pool in a Scottsdale suburb provided by a neighborhood association (d) All of the above 7. Sustainability requires minimizing humans’ impact on the natural environment. (a) True (b) False 8. The law of demand says that (a) As income increases, demand for a good increases (b) If the price elasticity of demand is greater than 1, demand is elastic (c) As the price of a good increases, quantity demanded decreases (d) All of the above 9. Which of the following is true of the market equilibrium in the presence of a negative externality? (a) Equilibrium price and quantity will be too high, relative to the socially efficient outcome (b) Equilibrium price will be too high, and quantity too low, relative to the socially efficient outcome (c) Equilibrium price will be too low, and quantity too high, relative to the socially efficient outcome (d) As long as markets are competitive, the market equilibrium price and quantity will be socially efficient. 10. The marginal benefit (demand) curve for pollution for an industry is P = 250 − 5Q, where Q is emissions in tons. The current emissions tax (price) for pollution is $90/ton. Regulators are curious if a 10% decrease in the pollution tax will lead to a disproportionate percentage increase in emissions. You calculate the elasticity of pollution demand and conclude (choose one): (a) Demand is elastic. A reduction in the tax will lead to a disproportionately large increase in emissions. (b) Demand is elastic. A reduction in the tax will lead to a smaller than proportional increase in emissions. (c) Demand is inelastic. A reduction in the tax will lead to a disproportionately large increase in emissions. (d) Demand is inelastic. A reduction in the tax will lead to a smaller than proportional increase in emissions. 2 Long Answer (70 Points) 11. (40 points) Both California (denoted C) and Arizona (denoted A) residents like to consume Siracha Hot Sauce, which is made in Los Angeles, California. The two groups demand curves for bottles of Siracha are P = 120 − 6qA P = 120 − 3qC (a) (10 points) Find the market demand curve for Siracha, assuming Arizona and California are the entire market. Carefully graph this demand curve, labeling the intercepts. (b) (5 points) The supply curve for Siracha is P = 30+7Q. Graph the supply curve with the market demand curve, find the market equilibrium price and quantity, and label them on the graph. (c) (5 points) Carefully label the area corresponding to consumer surplus on your graph and calculate the consumer surplus. 3 (d) (5 points) Carefully label producer surplus on the graph and calculate producer surplus. (e) (7 points) Unfortunately, the Siracha factory produces a cloud of toxic Siracha Steam that burns the eyes and lungs of nearby residents, causing marginal damages equal to MD = 6Q. Find the social marginal cost of producing a given amount of Siracha and plot the demand curve, social marginal cost curve, marginal damage curve, and private marginal cost curve. (f) (8 points) Find the socially efficient level of Siracha production and label the deadweight loss associated with the unregulated market outcome on your graph from the pervious part. 4 12. (20 points) The demand (marginal benefit) curve for air pollution abatement in Phoenix, Arizona is: 2, 650 − 10 × (T emperature) − 15Q where temperature is the average daytime temperature, measured in degrees Farenheit and Q is parts per million (ppm) of CO2 emissions abated. (a) (5 points) How does the air temperature affect the benefits of emissions abatement? When it is hot outside, are the benefits of abatement larger or smaller than when it is cold out? (b) (5 points) Suppose the average daytime temperature in the Winter is 70 degrees. Draw the marginal benefit curve for CO2 abatement in Winter and carefully label the intercepts. (c) (5 points) The city implements a program that results in 30 ppm of emissions abatement in the winter. What is the total benefit from this program? 5 (d) (5 points) In the Summer, the average day time temperature is 100 degrees. Draw the demand for emissions abatement in the Summer and calculate the total benefits of the city’s program to abate 30 ppm if it is implemented in the Summer. (e) BONUS: (10 points) Suppose the city’s program can only achieve a total of 30 ppm of abatement over the course of the year. To maximize total benefits, how much abatement should the city pursue in the Winter, and how much in the Summer? 6

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