1) The table below shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs.
| Price per event | QD (# musical trumpet events) | QS1 | QS2 |
| $20 | 0 | 10 | 8 |
| 18 | 1 | 9 | 7 |
| 15 | 2.5 | 7.5 | 5.5 |
| 12 | 4 | 6 | 4 |
| 10 | 5 | 5 | 3 |
| 5 | 7.5 | 2.5 | 0.5 |
a) What is the externality in this situation? Is it positive or negative?
b) What are the equilibrium price and quantity when we account for only private costs?
c) What are the equilibrium price and quantity when we also account for social costs?
d) Which equilibrium is more efficient from the perspective of society as a whole?
e) What action can the government take to move the city closer to the social optimum using command-and controlpolicies?
f) What action can the government take to move the city closer to the social optimum using market-oriented policies?
2) The table below shows possible combinations of economic output and reduction of pollution in a small town, depending on what kinds of environmental regulations you choose.
| Option | Economic Output | Pollution Cleaned Up |
| H | $1000 | 0% |
| J | 800 | 10% |
| K | 500 | 30% |
| L | 600 | 40% |
| M | 400 | 40% |
| N | 100 | 90% |
a) Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the percentage reduction of pollution, and with the quantity of economic output on the vertical axis.
b) In the choice between K and L, can you say which one is better, and why?
c) In the choice between K and N, can you say which one is better, and why?
3) What are some key international externalities (externalities that are created in one country but impact another country)? How can countries address these externalities? Give at least two examples.
4) HighFlyer Airlines wants to build new airplanes with greatly increased cabin space.This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like engine and luggage placement, and the most efficient shape of the plane for moving through the air. HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates of how these approaches would affect the plane’s operating costs and ticket sales. Based on these estimates, the table below shows the value of R&D projects that provide at least a certain private rate of return. Column 1 = Private Rate of Return. Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines. Use the data to answer the questions that follow.
| Private Rate of Return | Value of R & D |
| 12% | $100 |
| 10% | 200 |
| 8% | 300 |
| 6% | 400 |
| 4% | 500 |
a) If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?
b) Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return. How much investment is socially optimal at the 6% interest rate?
c) What can the government do to encourage a socially optimal amount of research and development?
5) The table below shows production levels for a perfectly competitive firm that hires labor as the only variable resource (assume that other resources are fixed).
| Workers | Units of Output per Hour | Marginal Product of Labor (MPL) | Value of the Marginal Product (VMP) when Product Price = $10 |
| 0 | 0 | ||
| 1 | 7 | ||
| 2 | 13 | ||
| 3 | 19 | ||
| 4 | 25 | ||
| 5 | 28 | ||
| 6 | 29 | ||
| 7 | 29 |
a) Calculate the marginal product for each additional worker and add it to the table above.
b) Assume that the product sells for $10. Add the value of the marginal product (VMP) of each worker to the table above.
c) Find the demand curve by filling in the number of workers hired at each wage rate shown in the following table:
| Worker Hourly Wage | Workers Demanded | Workers Supplied |
| 0 | 0 | |
| $10 | 1 | |
| 20 | 2 | |
| 30 | 3 | |
| 40 | 4 | |
| 50 | 5 | |
| 60 | 6 | |
| 70 | 7 | |
| 80 | 8 |
d) Given the Demand information that you added to the table above combined with the Supply Schedule that is listed in the table, what is the equilibrium wage rate?
e) What is the equilibrium number of workers hired?
6) Consider the figure below which represents a competitive labor market for master gardeners in an urban area:
a) What is the equilibrium salary for master gardeners in this market?
b) Indicate what will happen to demand, supply, and to the equilibrium salary in each of the situations listed in the table:
| Situation | Impact on Demand (Increase, Decrease, or No Change) | Impact on Supply (Increase, Decrease, or No Change) | Impact on Equilibrium Salary (Increase, Decrease, or No Change) | Impact on equilibrium number of workers (Increase, Decrease, or No Change) |
| 1.An increase in working from home causes people to expand their home gardens. | ||||
| 2.Indoor work becomes more dangerous due to a pandemic while outdoor work like gardening remains safer. | ||||
| 3.Technological improvements in gardening design software make it possible to design and install gardens for less cost. | ||||
| 4. Training costs and licensing fees for master gardeners increase. | ||||
| 5. A union is established and a minimum salary of $60,000 is negotiated. | ||||
| 6. The gardening companies in the city all merge, resulting in one large employer in the city. |
7) Wage gaps based on gender, race, ethnicity, and age have existed for many years, as shown in the following figure:
Source: U.S. Department of Labor.
- What are some reasons for these gaps? Briefly describe at least two.
- What would be needed to determine how much of a gap is due to discrimination?
- Briefly describe at least one strategy for reducing wage gaps due to discrimination.