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Economics Questions and Answers For Course code (Econ 101)

## Marina's Water Demand Schedule

1. (20 points) Below is a table showing the town of Marina’s demand schedule for water. Assume the town’s water sellers incur only a fixed cost of \$1,000 and (a constant) marginal cost of \$1 per gallon.

a. If the market for water in Marina is perfectly competitive, the equilibrium price of water is \$____ per gallon and the equilibrium quantity of water sold is ____ gallons.

If the market for water in Marina is a monopoly, the profit-maximizing monopolist will produce 500 gallons of water (since marginal revenue equals marginal cost at this point) and make \$1,000 in profits. Suppose instead there are exactly two sellers of water in Marina, Ocean Salt and Ocean Fresh. They collude, split the fixed cost, and each agrees to produce and sell 250 gallons of water, charge a price of \$5 per gallon, and each get profits of \$500. However, Ocean Salt thinks she can earn more profits by deviating from her agreement with Ocean Fresh by increasing production to 300 gallons. Ocean Fresh also considers the same calculation – sticking to the collusion agreement or deviating to produce 50 more gallons.

b. Assuming Ocean Salt and Ocean Fresh evenly split the fixed costs, construct the normal form representation of the cartel game. (Hint: feel free to interpolate to determine the market price for a given quantity, if necessary.)

c. Does either participant have a dominant strategy? If so, what is it?

d. Which outcomes, if any, are Nash Equilibria?

e. Redraw your game, but this time assume Ocean Fresh and Ocean Salt contemplate a jump from the monopoly/collusive agreement to producing 350 gallons (vice 300).

f. Does either participant have a dominant strategy? If so, what is it?

2. (20 points) Consider the case of Anne who is deciding how many hours to work each month. If she works, she can earn \$15 per hour before taxes and can work up to 200 hours per month. Consider two flat income tax rates, 15% and 30%.

a. On the same diagram, with leisure on the x-axis and consumption on the y-axis, draw two monthly budget constraints reflecting the two different tax rates. For full credit label each line and its x- and y- intercepts.

b. On the diagram you drew in the previous question, draw a set of representative indifference curves showing that Anne works fewer hours when the tax rate is 30% compared to when the tax rate is 15%. Clearly label the indifference curve associated with each tax rate.

## Anne's Monthly Working Hours and Taxes

c. Given the difference in Anne’s labor supply across the two tax rates,

1. the income effect must dominate for Anne.-or-

2. the substitution effect must dominate for Anne.

d. Concisely explain how the income and substitution effects on demand for leisure hours led Anne to work fewer hours at the higher tax rate. If it's easier for you to explain using a table you draw, include it in your image file to answer previous questions.

3. (10 points) State whether the following is a private good, a public good, a common pool resource, or a club good. Be sure to explainyour reasoning to obtain full credit.

a. Coho salmon that reside in the northern Pacific Ocean

b. California Highway 101

c. The services provided by the Monterey Police Department

4. Government cheese (as part of a plan to keep dairy prices high, for decades the government would buy up surplus milk from producers and turn it into cheese that they would hand give to food banks, those on welfare, the elderly, etc. So, this is cheese produced by the government.)

1. K-12 education

5. (10 points) In our readings and classroom discussions, we discussed whether support for war would tend to be higher (all else equal) with a conscripted military or an all-volunteer military. Use the Median Voter Theorem to analyze this topic and determine which manpower regime would likely result in greater support for wars in general.

6. (10 points) The state of California requires all locksmiths to obtain a license. The process involves submitting fingerprints and paying a variety of fees. In addition, prospective firms are subjected to extensive contractor requirements if they wish to pursue projects in excess of \$500. (It may help to know that only ~15 states require licenses for locksmiths.) In addition, there are no training, educational, or certification requirements. Examine these facts from within a rent-seeking paradigm. (That is, draw a conclusion as to whether rent-seeking can explain this arrangement.) Be sure to identify the beneficiaries of this arrangement and identify who, if anyone, bears the cost of it. The best answers will also appropriately identify the categories of waste.

7. (5 points) (True / False / Uncertain) From the perspective of economic efficiency, the requirement that only those licensed by the State may practice medicine reduces economic efficiency. Explain.(Just to be clear, risk of death or injury could (should) be included in an economic analysis. My choice of the term “economic efficiency” was NOT an attempt to signal to you that you should necessarily neglect the safety of consumers.)

8. (5 points) (True / False / Uncertain) According to economists, the probability that an individual’s vote makes a difference in an election is 1/N, where, N is the number of people who cast a vote. Explain.

9. (10 points) You’ve been asked to evaluate the impact of the Force Fitness Instructor (FFI) Program of the Marine Corps, established in January 2016. Units across the Corps are asked to send one of their Marines to Quantico VA for FFI training over several weeks in the latest methods of strength and conditioning techniques, programming, nutrition, and injury prevention. The FFI’s then return to their units where they are charged with improving fitness of their units.

The following Table summarizes the average Physical Fitness Test (PFT) and Combat Fitness Test (CFT) scores of Marines in the units who participated in the FFI program in 2016- 17 and the units who didn’t.

a. The difference-in-differences estimate of the impact of the FFI program on Marines’ PFT scores is ____.

b. The difference-in-differences estimate of the impact of the FFI program on Marines’ CFT scores is ____.

c. What is the crucial statistical assumption you have to make for this to be a valid estimate of the impact of the Marine Corps’ FFI program on the physical fitness of Marines?

d. (5 points) Why is the Randomized Control Trial the “gold-standard” for solving the identification problem? That is, what about RCTs allow us to impute causation?

10. (5 points) Researchers often find evidence that children that have better grades in school tend to be from households that, on average, possess more books than the households of children who do not perform was well in school. The policy prescription they sometimes offer is to propose programs whose purpose is to give children books. What, if anything, is wrong with this line of thinking?