chapter 10

6. Greater consumption of alcohol leads to more motor vehicle accidents and,

thus, imposes costs on people who do not drink and drive.
a. Illustrate the market for alcohol, labeling the demand curve, the social-
value curve, the supply curve, the social-cost curve, the market
equilibrium level of output, and the efficient level of output.

b. On your graph, shade the area corresponding to the deadweight loss of

the market equilibrium.
(Hint: The deadweight loss occurs because some units of alcohol are
consumed for which the social cost exceeds the social value.) Explain.
8. The Pristine River has two polluting firms on its banks. Acme Industrial and Creative
Chemicals each dump 100 tons of glop into the river each year. The cost of reducing glop
emissions per ton equals $10 for Acme and $100 for Creative. The local government wants
to reduce overall pollution from 200 tons to 50 tons.
a. If the government knew the cost of reduction for each firm, what reductions would
it impose to reach its overall goal? What would be the cost to each firm and the total
cost to the firms together?
The government would impose a reduction of 100 tons for Acme and the remaining 50 tons for
Creative.
This solution would minimize the total cost of reducing the pollution.
For Acme: Cost of reducing pollution =100*$10 =$1000
For Creative: Cost of reducing pollution =50*$100 =$5000
Thus Total cost = $6000

b. In a more typical situation, the government would not know the cost of pollution
reduction at each firm. If the government decided to reach its overall goal by imposing
uniform reductions on the firms, calculate the reduction made by each firm, the cost to
each firm, and the total cost to the firms together.
Uniform reductions would result in the following total cost:
Each firm reduces 75 tons
For Acme: Cost of reducing pollution =75*$10 =$750
For Creative: Cost of reducing pollution =75*$100 =$7500
Total cost = $8250

c. Compare the total cost of pollution reduction in parts (a) and (b). If the government
does not know the cost of reduction for each firm, is there still some way for it to
reduce pollution to 50 tons at the total cost you calculated in part (a)? Explain.
The government could issue 50 pollution permits that each allow 1 ton of pollution. Then an
efficient reduction in pollution would occur because Creative Chemicals would be willing to
pay Acme Chemicals an amount for the pollution permit that is greater then the value of the
permit to Acme.

Chapter 11

5. Why is there litter along most highways but rarely in people’s yards?

Litter on highways are generally seen because the social cost of littering is not
borne directly by anybody. Nobody attaches any value to cleaning the highways.
So people don't see any benefit in keeping the highways clean and they also don't
bear any direct cost so we can find litter on highways.
 8. An Economist article (March 19, 1994) states: “In the past decade, most of the rich
world’s fisheries have been exploited to the point of near-exhaustion.” The article
continues with an analysis of the problem and a discussion of possible private and
government solutions:

a. “Do not blame fishermen for overfishing. They are behaving rationally, as they have
always done.” In what sense is “overfishing” rational for fishermen?
Overfishing is rational for the fishermen in the context that fishing serves as their livelihood
and the amount the fishing they do is rational because that is their source of income.
b. "a community, held together by ties of obligation and mutual self-interest, can manage a
common resource on its own." Explain how such a management can work in principle,
and what obstacles it faces in the real world.

In principle, each member of the community would be concerned for the management of
common resources, and as a result each person would act responsibly to ensure that the resource
is maintained.

This faces significant obstacles in the real world, since individuals are generally concerned
primarily with their own well-being. As a result, if even one individual breaks their commitment
to manage the resource, others will see that nothing is being done and will follow suit. Soon, the
concept of common resource is likely to crumble and each member of the community will be
grasping for individual gain.

d)The artical notes that many governments come to the aid of suffering
fisherman in mways that encourage increased fishing.
How do such policies encourage a vicious cycle of overfishing?

Governments in general are regulatory bodies that rule for a relatively short term (in comparison
with the growth or depletion of fish stocks). Therefore, there is a tendency to try a please their
constituents (such as fishermen) by implementing policies that may not always be considering
the long term resolution of the problem. In this situation, indirectly allowing for overfishing by a
government will deplete stocks. This will result in controversy and possible a reduction in
fishing rights. As the fish stock replenishes, the cycle will continue. As a result, fish stocks
would not be able to get to a point of sustainability.

e)"Only when fishermen believe they are assured a long-term and exclusive right to a
fishery are they likely to manage it in the same far-sighted way as good farmers manage
their land." Defend this statement.

A long-term and exclusive right to a fishery implies ownership – bygiving fisherman ownership
of what was previously a common resource, they will be more willing to preserve what they have
in order to ensure future stock levels are maintained. Otherwise, each fisherman will be
interested in only the short term since they know that if they do not catch a fish today, another
fisherman will likely come by and take it from them.
f. What other policies to reduce overfishing might be considered?

Several policies can be implemented, including limits on fishing, seasonal restrictions to prevent
fishing during spawning season, providing licenses to a limited group of fisherman (and perhaps
giving each of them individual limits) are all possible courses of action.

CHAPTER 12

6. Some states exclude necessities, such as food and clothing, from their sales tax. Other
states do not. Discuss the merits of this exclusion. Consider both efficiency and equity.
It's less efficient to exclude food and clothing, as you have introduced complexity to
the collection of sales tax.

It's more equitable and more moral to exclude food and clothing, as they are
necessities. They should not be taxed at the same level as luxuries or "sin goods" such
as tobacco or alcohol.
10. The Tax Reform Act of 1986 and the Composition of Consumer Debt eliminated the
deductibility of interest payments on consumer debt (mostly credit cards and auto loans)
but maintained the deductibility of interest payments on mortgages and home equity
loans. What do you think happened to the relative amounts of borrowing through
consumer debt and home equity debt?

Chapter 13

8. You are thinking about setting up a lemonade stand. The stand itself costs $200. The
ingredients for each cup of lemonade cost $0.50.

a. What is your fixed cost of doing business? What is

your variable cost per cup?
fixed cost: $200
variable cost per cup: $0.5
VC per gallon: %0.5 * 16= $8

b. Construct a table showing your total cost, average total cost, and marginal cost for
output levels varying from zero to 10 gallons. (Hint: There are 16
cups in a gallon.)
 output Fixed cost Variable cost total cost Average total cost Marginal cost
1 $200 $10 $210 $210
2 $200 $50 $250 $125 $85
3 $200 $130 $330 $110 $15
4 $200 $190 $390 $97.5 $12.5
5 $200 $305 $505 $101 $3.5
6 $200 $340 $540 $90 $11
7 $200 $125 $325 $46.4 $43.6
8 $200 $370 $570 $71.25 $24.85
9 $200 $500 $700 $77.8 $6.55
10 $200 $510 $710 $71 $6.8

Draw the three cost curves.

Chart Title
600

500

400

300

200

100

0
1 2 3 4 5 6

total cost avg total cost marginal cost

9. Your cousin Vinnie owns a painting company with fixed costs of $200 and the following
schedule for variable costs Calculate average fixed cost, average variable cost, and
average total cost for each quantity. What is the efficient
scale of the painting company?
 Fixed Variable Total Avg total Avg fixed Avg
cost cost cost cost cost variable
1 200 10 210 210 200 10
2 200 20 220 110 100 10
3 200 40 240 80 66.67 13.33
4 200 80 280 70 50 20
5 200 160 360 72 40 32
6 200 320 420 70 33.33 53.33
7 200 640 840 120 28.57 91.43