Subject: Economics    / General Economics

Question
b Public Sector Microeconomic Analysis
ECO 2110A – Fall 2016
C. Théoret Blue Assignment Instructions
1.
2.
3.
4.
5.
6.
7. Completing an assignment is optional.
Please complete the assignment that was randomly allocated to
you.
Submitting an assignment of a different colour will result in a 0
(zero) score.
The course code for the BLUE assignment is ECO2110AB.
BLUE answer sheets will be distributed and collected at the
beginning of the Thursday December 1st lecture.
Late answer sheets will not be accepted.
all possibilities (e.g., answers a) True; b) False)).
For example, if the answers a), b), c) and d) following a question
seem incorrect to you, you should add the answer “e) None of
these answers”. Of course, the alphabetic character of the
the last answer provided (i.e., it could be c), d) or e)). Questions 1 to 6

• Carla and Ernie have a total income (Y) of \$1,000.
Carla’s utility function is UC = 5Y0.4
Ernie’s utility function is UE = 2Y0.6.

1. If Carla’s oncome is 70% of total income, her total utility (1st decimal; no rounding) is
a. 15.2
b. 17.1
c. 40.4
d. 68.7

2. If Carla’s oncome is 70% of total income, Ernie’s utility (1st decimal; no rounding) is
a. 55.2
b. 57.1
c. 61.2
d. 76.9

3. If the social welfare function is additive (UC + UE), what should Carla’s income be to maximize
social welfare?
a. 180
b. 200
c. 400
d. 600

4. If the social welfare function is UC + UE, what should Ernie’s income be to maximize social
welfare?
a. 220
b. 320
c. 680
d. 800

5. If the social welfare function is UC + 2UE, what should Carla’s income be to maximize social
welfare? [Comment: This reflects the fact that society values a “util” to Ernie twice as much as
a “util” to Carla.]
a. 40
b. 50
c. 60
d. 70

6. What should Ernie’s income be for Carla and him to have equal utilities?
a. \$0
d. \$1000

Blue Assignment Page 2 Questions 7 to 11
Alpha, Beta and Gamma are the only citizens of a small town.
The three citizens must decide on the number of garbage cans for the town.
Each citizen’s marginal benefits (MB) from garbage cans (x) is:
• Alpha: MB = 1000-4x.
• Beta: MB = 2000-8x.
• Gamma: MB = 3000-12x.

7. If the marginal cost of garbage cans is \$1200 (very good quality garbage cans), the optimal
social number of garbage cans is
a. 100
b. 200
c. 300
d. 350

8. Alpha’s marginal benefit at the optimal number of garbage cans is
a. \$100
b. 200
c. 300
d. 1000

9. Gamma’s marginal benefit at the optimal number of garbage cans is
a. \$0
b. 400
c. 600
d. 800

10. If each resident was asked to pay one-third of the cost of the garbage cans, Beta would
a. agree with the project and pay her/his share of the cost.
b. disagree with the project and pay nothing.
c. be unsure whether he/she would pay his/her share or not.
d. be indifferent between having the garbage cans or not.

11. If Alpha was asked to pay 50% of the cost of garbage cans, she/he would
a. agree with the project and pay her/his share of the cost.
b. disagree with the project and pay nothing.
c. be unsure whether he/she would pay his/her share or not.
d. be indifferent between having the garbage cans or not.

Blue Assignment Page 3 Questions 12 to 16
Firm A has a marginal pollution abatement cost of \$15x while Firm B’s marginal abatement
cost is \$10X.
Please note that the cost to Firm A of reducing pollution by 1 tonne is \$150, reducing a
second tonne will cost 15(2) = \$30 … The same principle holds for Firm B.

12. Firm A currently emits 400 tons of pollution and firm B emits 200 tonnes of pollution. If
government regulators require that each firm reduce its emissions by 50 tons, Firm A’s total
cost of emissions reduction will be
a. \$7,500
b. 12,750
c. 16,000
d. 19,125

13. Firm A currently emits 400 tons of pollution and firm B emits 200 tons of pollution. If
government regulators require that each firm reduce its emissions by 50 tons, Firm B’s total
cost of emissions reduction will be
a. \$7,500
b. 12,750
c. 16,000
d. 19,125

14. Firm A currently emits 400 tons of pollution and firm B emits 200 tons of pollution. By what cost
effective amount should firm A reduce its emissions if government regulators want to reduce
total (Firm A’s reduction + Firm B’s reduction) pollution by 100 tonnes?
a. 20 tonnes
b. 30
c. 40
d. 60

15. Firm A currently emits 400 tons of pollution and firm B emits 200 tons of pollution. By what cost
effective amount should firm B reduce its emissions if government regulators want to reduce
total (Firm A’s reduction + Firm B’s reduction) pollution by 100 tonnes?
a. 20 tonnes
b. 30
c. 40
d. 60

16. Firm A currently emits 400 tons of pollution. What emissions fee per ton would be required to
cause Firm A to optimally reduce its pollution emissions if the marginal social benefit from
pollution reduction is 1500-15T (T=tons)?
a. \$10
b. 20
c. 40
d. 60.

Blue Assignment Page 4 Questions 17 to 23

• • Firms Small, Medium and Large are the only polluters of Big Horn Township in 2015.
Each firm’s pollution levels in 2015 and their respective marginal cost of pollution
abatement are given below.
The township has decreed that its total pollution level in 2016 must decrease from
1200 tonnes in 2015 to 900 tonnes in 2016.
To this end, the township distributed 300 permits to each firm in January 2016. • Firm Pollution Level in 2015
(Tonnes) Marginal pollution
abatement cost
(\$) Small 200 120 Medium 400 100 Large 600 90 Assumptions:
• The market price of a permit is \$105 in 2016.
If two firms sell some of their permits, they must sell an equal number to
the buyer of permits. Blue Assignment Page 5

17. If each pollution permit sells for \$105, Small will
c. sell 10 permits
d. sell 60 permits.

18. If each pollution permit sells for \$105, Medium will
c. sell 25 permits
d. sell 50 permits.

19. If each pollution permit sells for \$105, Big will
a. reduce its year-to-year pollution by 200 tonnes
b. increase its year-to-year pollution by 225 tonnes
c. reduce its year-to-year pollution by 225 tonnes
d. maintain its 2015 pollution level.

20. If each pollution permit sells for \$105, Medium will
a. reduce its year-to-year pollution by 100 tonnes
b. increase its year-to-year pollution by 125 tonnes
c. reduce its year-to-year pollution by 75 tonnes
d. maintain its 2015 pollution level.

22. With the 900 tradable pollution permits, the total cost (\$) of reducing pollution from 1200 in
2015 to 900 tonnes in 2016 will be
a. 10,000
b. 12,000
c. 13,875
d. 27,750.

23. With a command-and-control pollution reduction policy (where each firm cuts back its pollution
by 100 tonnes in 2016), the total cost (\$) of reducing pollution from 1200 in 2015 to 9000
tonnes in 2016 will be
a. 21,000
b. 26,000
c. 31,000
d. 36,000. Blue Assignment Page 6 Questions

24 to 27 24. Consumer surplus with the subsidy is given by the sum of areas
a. A+B+C+G+H
b. A+B+C+G+H+K+M
c. A+B+C
d. A+B+H

25. Producer surplus with the subsidy is given by the sum of areas
a. B+C+D
b. C+D+G+H
c. B+C+D+G+H+P
d. B+C+D+H+P

26. What is the cost to government of the subsidy to producers? The sum of areas
a. B+C+G+H
b. B+C+G+H+K
c. B+C+G+H+K+M
d. B+C+G+H+K+M+Q

27. What is the welfare gain or loss to society with the subsidy (consumers, producers and
Government (i.e., tax payers)
a. loss = Q
b. gain = Q
c. Neither loss nor gain. Blue Assignment Page 7 Questions 28 to 33

• Citizens John, Lois and Betty must select between a new community centre and new water
treatment plant.
The net benefits of the projects to each voter are given in the following table. Project
Community Centre
Water Treatment Plant John
-3
-4 Lois
+9
-6

28. Which project(s) would be selected by a majority rule?
a. The community centre.
b. The water treatment plant..
c. Both projects.
d. Neither project.

29. Would the outcome with the majority rule be efficient?
a. Yes.
b. No.
c. Maybe.

30. Which project(s) would be selected if logrolling were allowed?
a. The community centre.
b. The water treatment plant..
c. Both projects.
d. Neither project.

31. Would the outcome with logrolling be efficient?
a. Yes.
b. No.
c. Maybe.