NUMBER1

Your government would like to increase the consumption of Jamoca Almond

Fudge®

flavored ice cream produced by the B&R Corp. Extensive research by the

government Health Department has determined that public health greatly benefits

from Jamoca Almond Fudge®. So the government has decided to lower by one

dollar the price that the consumer has to pay for each scoop of Jamoca Almond

Fudge® sold. That is, if the B&R Crop. has priced each scoop at $2.49, you and I

only have to pay $1.49 per scoop. The government gives B&R a dollar for each

scoop sold to cover the B&R costs and profit margins.

1. Show with a simple supply and demand diagram the free-exchange market for Jamoca

Almond Fudge®

before the price drop. Label the total area of welfare to the community from

this market, and label the welfare that goes to the producer and to the consumer. (5 points

possible)

2. Show what happens to the diagram with the price drop. Label the new price and quantity

impact, and show how TOTAL welfare changes, if at all. (10 points possible)

3. Assume that the money that is given to B&R comes from a unit tax on vegetable purchases (an

unhealthy food source). Label and describe what happens in the vegetable market after the

imposition of the vegetable tax, if anything, to the size of the CONSUMER AND PRODUCER

WELFARE in this market UNDER EACH OF THE TWO following assumptions. The

government gives all of the tax back to the vegetable consumers in the form of a cash payment.

Or, the government takes the money and uses it for disaster relief in a poor far-off country hit by

an earthquake. When the government gives all of the tax back to the people, is the level of former

welfare restored? Explain your answer. (15 points possible)

4. According to the Microeconomic Theory of Welfare Economics, what is the simple formula

rule that expresses efficiency in the market for Private Goods and what is the connection

between this formula and the concept of horizontal addition of individual market demand

curves? (5 points possible)

According to the Microeconomic Theory of Welfare Economics, what is the simple formula rule

that expresses efficiency in the market for Public Goods and what is the connection between this

formula and the concept of the vertical addition of individual market demand curves? (5 points

possible)

5. Jehanne and Joan are the only two consumers in a two good (Häagen Dazs® Vanilla and

B&R Jamoca Almond Fudge® ice creams) market exchange economy that is in

COMPETITIVE EQUILIBRIUM. Jehanne is currently willing to trade seven scoops of

Häagen Dazs® Vanilla for one scoop of Jamoca Almond Fudge®

What is the First Fundamental Theorem of Welfare Economics? (5 points possible)

NUMBER2

Your government has decided to build a new recreational facility that will have

weight rooms, a swimming pool, a running track, etc. Your government claims that

this exercise facility will encourage people to get more exercise and be healthier.

The cost of this project is ONE HUNDRED MILLION dollars. The government will

finance this project by borrowing by issuing government bonds, and from

voluntary, charitable contributions from the super-rich. Access and entry into the

new facility will be free-of-charge to ALL the people in the community.

As construction continues on this rec. center, YOU have no intention of ever using

it. You certainly have not donated any money for the project; in fact you think the

whole thing is a waste of money. You prefer that the government spend more

money subsidizing undergraduates by paying for their textbooks. However, you are

not unwilling to benefit from exercise, should it potentially make you healthier.

1. What is it about this recreational center that “might” qualify it as being a public good? (5

points possible)

2. What is meant by the “free rider” issue and how “might” this issue affect you personally with

respect to the exercise project? (5 points possible)

3. From a public good standpoint how would this rec. center differ from a government project to

build a toll bridge across the San Francisco Bay? (10 points possible)

4. Now, your government decides to build a huge museum of modern art in your city. Once

again, construction costs are covered by government borrowing. But once built, the museum

charges an admission of $12.00 for entry. Are there some aspects of this museum that makes it a

public good? Can you call the museum a merit good? What is a merit good? (15 points

possible)

5. With the case of the modern art museum, the government hopes to “pay” for the on-going

costs of the project with admission fees. With the exercise facility, there is no obvious fee

collected from the people who use it. In what ways do you think the government hopes that it (or

the community) will be compensated for this $100 million outlay for the new recreation hall? For

full credit, give specific examples. (15 points possible)

NUMBER3

For each of the following “commodities” and using the definitions of NONRIVAL

and NONEXCLUDABLE, please say if you can label the good as a pure public

good, a partial public good, or a private good. Write a sentence justifying your

answer. (2 points each = up to 10 points possible)

1.

The Grand Canyon National Park in Arizona

The US Patriot Anti-incoming missile defense system

The ECN 130 Public Economics Course at UCD

Earthquake forecasts from the United States Geological Survey

A 2013 Audi “tt” fire-engine-red Coupe Quattro® with Bose®

Sound System

The Free Rider problem.

The government of Greece has threatened to default on its international borrowing from

commercial banks in the United States. This means that the $500 billion dollars that Bank

of America, Citibank, and Wells Fargo have lent to the government of Greece will not be

paid back. If the loans are not repaid, these three American banks will go “bankrupt” and

the system of credit and loans in the U.S will come to a screeching halt.

Naturally, the American government comes to the rescue. It raises taxes on the American

people in various ways, and (essentially) hands over to the Greek government the money it

needs to repay the banks. (Of course, the Greek government makes all kinds of promises to

the US in order to get the money, but whether or not these promises are kept is more of an

ECN 136, 101, or 160B issue)

Anyway(s), you are a student, you don’t work or pay taxes, and you “claim” you are

DISGUSTED that the US government is bailing out those greedy banks after their “bad”

judgment about lending to Greece. Yet, you are starving to dig into three scoops of Jamoca

Almond Fudge® ice cream (a B&R flavor). You satisfy this craving by paying with a Bank

of America VISA “rewards” credit card, something you really like doing.

2. Are you a Free Rider? If so, why or why not? (10 points possible)

3. Can you say that the commodity of a Strong and Stable Banking System is a Private or a

Public Good? Explain your answer (10 points possible)

4. Now, let’s say that the government has raised SALES taxes (a unit tax on consumption) to pay

for the “bank bailout”. With a simple supply and demand diagram, show how this tax increase

would change the state of consumer, producer, and total welfare in the market for Jamoca

Almond Fudge®

. (10 points possible)

5. Given your “disgust” above, do you think that the changes in welfare on your diagram are

worth it, or should we just let the banks fail because the “greedy” bank executives did not assess

the market for loans correctly? Give a solid defense of your answer. (10 points possible)