Name:__________________________

Student number:____________________

Economics 3B3
J. Leach
April 2005

Day Class
Duration of Exam: 3 hours
Maximum Score: 30 points
McMaster University Deferred Examination
This examination paper includes 12 pages and 30 questions. You are responsible for ensuring that your copy of the paper is complete. Bring any
discrepancy to the attention of your invigilator.
Special Instructions:
Only the Casio FX-991 calculator is allowed.
Choose the best answer to each question. Enter these answers in spaces 130 on your
answer sheet.
Carefully read and follow the OMR instructions on the following page.

Continued on page 2

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Page 3
For questions 14, consider an economy inhabited by two people, George and Harriet, who
consume two goods, ale and bread. Georges utility function is
UG = aG (bG )2
where aG and bG are his consumption of ale and bread. Harriets utility function is
UH = aH (bH )3
where aH and bH are her consumption of ale and bread. George is endowed with 20 units of
ale and no bread, and Harriet is endowed with 30 units of bread and no ale. Let p be the
price of ale measured in bread.
1. Which of the following is a Pareto optimal allocation?
(a) aG = 10; bG = 12; aH = 10; bH = 18:
(b) aG = 12; bG = 15; aH = 6; bH = 15:
(c) aG = 15; bG = 20; aH = 5; bH = 10:
(d) all of the above are Pareto optimal allocations.
(e) both (a) and (c) are Pareto optimal allocations.
2. Harriets excess demand for ale is
(a)

30
4p

(b) 30

1
4p

10
p
10
(d)
30
p
(e) none of the above.
(c)

3. If the price p were equal to 3, Harriets best attainable commodity bundle would contain
(a) 2.5 units of ale and 22.5 units of bread.
(b) 3 units of ale and 21 units of bread.
(c) 4.5 units of ale and 16.5 units of bread.
(d) 6 units of ale and 12 units of bread.
(e) none of the above.
Continued on page 4

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4. The market-clearing value of the price p is
(a) 1/3.
(b) 1/2.
(c) 9/52.
(d) 2/3.
(e) none of the above.
5. Consider an economy inhabited by two people, George and Harriet, who consume two
goods. One of which is private and the other is public. Georges utility function is
UG = z 1=2 + (bG )1=2
where z is the quantity of the public good and bG is Georges consumption of the
private good. Harriets utility function is
UH = z 1=2 + (bH )1=2
where bH is Harriets consumption of the private good. A unit of the private good can
be converted into a unit of the public good. The economy is endowed with 38 units of
the private good. Which of the following is a Pareto optimal allocation?
(a) bG is 16, bH is 4 and z is 20.
(b) bG is 6, bH is 6 and z is 26.
(c) bG is 9, bH is 4 and z is 25.
(d) bG is 9, bH is 9 and z is 20.
(e) none of the above allocations is Pareto optimal.
6. Competition for monopoly status does not generate a welfare loss as large as the present
value of monopoly prots if
(a) the resources expended are at least partially used for socially valuable purposes.
(b) only a small number of rms are competing for monopoly status.
(c) an arbitrarily large number of rms are competing for monopoly status.
(d) either (a) or (b) occurs.
(e) either (a) or (c) occurs.
Continued on page 5

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For questions 711, consider an economy inhabited by four people, identied by the numbers
1, 2, 3 and 4. The utility function of person i (where i is 1, 2, 3 or 4) is
Ui = bi z
Here, bi is person is consumption of bread and z is the quantity of a public good in the
economy. Each person is endowed with 20 units of bread. Four units of bread are needed to
produce each unit of public good.
7. Which of the following allocations is Pareto optimal?
(a) b1 = b2 = b3 = b4 = 15; z = 5:
(b) b1 = b2 = b3 = b4 = 5; z = 15:
(c) b1 = b2 = 16; b3 = b4 = 4; z = 10:
(d) b1 = b2 = b3 = b4 = 15; z = 10:
(e) none of the above is Pareto optimal.
8. There is a Pareto optimal allocation in which person 4 consumes no bread.
(a) This statement is true.
(b) This statement is false.
9. Imagine that the public good is provided through voluntary contributions. Let vi be
the quantity of bread contributed by person i, and let v i be the quantity of bread
contributed by the other three people. Person is best response function is
(a) vi = 20
(b) vi = 10
(c) vi = 20

vi
2
vi
2
vi
4

vi
4
(e) none of the above.

(d) vi = 5

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10. In the symmetric Nash equilibrium, each person contributes
(a) 4
(b) 5
(c) 10
(d) 12.5
(e) none of the above.
11. In the symmetric Nash equilibrium, the quantity of public good provided is
(a) 4
(b) 5
(c) 10
(d) 12.5
(e) none of the above.
12. The Coase Theorem states that
(a) if n 1 markets in a system of n markets are clearing, the last market is also
clearing.
(b) a Pareto optimal allocation of private goods is occurs when every persons marginal rate of substitution takes the same value.
(c) if externalities are present, the distribution of income depends upon the assignment of property rights.
(d) only one rm can survive in a market if production is characterized by increasing
returns to scale.
(e) the optimal quantity of a private good is being provided when the sum of the
marginal rates of substitution is equal to the marginal rate of transformation.
Continued on page 7

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For questions 1317, imagine a shery in which the catch in period t is
yt = st (bt )1=2
where st is the stock of sh in period t and bt is the number of active shing boats in period
t: Also, net natural additions in period t are
gt = 100(st )1=2
and the total resource cost of shing in period t is
ct = 10bt
13. In a steady state in which the number of active boats is 20, what is the stock of sh?
(a) 100.
(b) 150.
(c) 300.
(d) 500.
(e) none of the above.
14. Assume that the shery is competitive (that is, each sherman independently decides
whether or not to sh). If the current stock of sh is 40, what is the number of active
boats?
(a) 4.
(b) 16.
(c) 40.
(d) 80.
(e) none of the above.
15. If the shery is competitive, what is the steady-state stock of sh?
(a) 100:
(b) 400:
(c) 1600:
(d) 2000.
(e) none of the above.
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16. If the shery is competitive, what are industry prots in the steady state?
(a) 160
(b) 80
(c) 40
(d) 0
(e) none of the above.
17. Assume that the shery is myopically managed. If the current stock of sh is 80, what
is the number of active boats?
(a) 4.
(b) 8.
(c) 16.
(d) 32.
(e) none of the above.
18. Which of the following policies achieves a given amount of pollution abatement at the
lowest possible cost?
(a) a tax on emissions.
(b) a tax on output.
(c) controls on the pollution control technologies used by rms.
(d) a system that allows emission permits that can be traded.
(e) both (a) and (d).
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For questions 1922, consider an economy consisting of three people: Tom, Dick and Harry.
Their utility functions are
UT = (cT )2 cH
UD = (cD )2 cH
UH = c H
Here, cT , cD and cH are the quantities of a single good consumed by Tom, Dick and Harry.
Tom and Dick are each endowed with 600 units of this good, and Harry is endowed with no
units of the good. An allocation in this economy is a way of dividing up the existing goods
between the three people.
19. The allocation in which Tom and Dick each consume 350 units of the good, and Harry
consumes 500 units of the good, is Pareto optimal.
(a) This statement is true.
(b) This statement is false.
20. The allocation in which Tom and Dick each consume 500 units of the good, and Harry
consumes 200 units of the good, is Pareto optimal.
(a) This statement is true.
(b) This statement is false.
21. Assume that Tom and Dick each choose to donate some of their endowed goods to
Harry. If Tom donates 150 units, Dicks utility is maximized by donating
(a)
(b)
(c)
(d)
(e)

200 units.
150 units.
125 units.
100 units.
noneof the above.

22. A Nash equilibrium consists of a pair of donations, one from Tom and one from Dick,
such that neither person can alter his donation so as to make himself better o. In the
Nash equilibrium, how many units of goods does each person contribute?
(a)
(b)
(c)
(d)
(e)

120.
150.
180.
300.
none of the above.
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A community of identical individuals repeatedly use a congestible facility. An individual
who uses the facility gets a benet B and incurs a cost C: The benet B depends upon the
number of times (t) that he uses the facility:
B = 540t1=2
and the costs are proportional to the number of times that he uses the facility:
C = (z + p)t
Here, z is the congestion cost incurred on each use of the facility, and p is a toll that a user
must pay each time he uses the facility. The congestion cost is proportional to the average
number of times (v) that the other individuals use the facility:
z = 10v
23. If the toll is set equal to zero, how many times does each person use the facility?
(a)
(b)
(c)
(d)
(e)

9.
16.
25.
36.
none of the above.

24. If the management of the facility wants each person to use the facility 4 times, what
toll should it set?
(a)
(b)
(c)
(d)
(e)

25.
45.
65.
85.
none of the above.

25. Which of the following statements describes a Pareto optimal allocation in an economy
containing only two people?
(a) It maximizes each persons utility.
(b) It maximizes one persons utility subject to the constraint that the other reaches
some assigned utility level.
(c) Any adjustment to the allocation makes at least one person worse o.
(d) There is an alternative that makes one person better o without harming anyone
else.
(e) Both (b) and (c) are correct.
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For questions 2630, imagine that a rms production of goods inicts damages on the rms
neighbours. The rms private marginal cost is:
P M C = 2q
where q is the rms level of output. The marginal damage inicted upon the neighbours is:
MD = q
The price at which the rm sells each unit of its output is:
p = 60
Consumption of the good generates no externalities.
26. What is the socially optimal level of output?
(a) 5.
(b) 10.
(c) 20.
(d) 40.
(e) none of the above.
27. If the rm has the property rights, and there is no negotiation between the rm and
its neighbours, what is the level of output?
(a) 5.
(b) 10.
(c) 20.
(d) 40.
(e) none of the above.
28. If the rm has the property rights, and if the neighbours negotiate a change in the level
of output with the rm, what is the smallest payment that the rm would accept?
(a) 40.
(b) 60.
(c) 80.
(d) 100.
(e) none of the above.
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29. If the neighbours have the property rights, and if the rm negotiates a change in the
level of output with the neighbours, what is the smallest payment that the neighbours
would accept?
(a) 200.
(b) 150.
(c) 100.
(d) 50.
(e) none of the above.
30. If the rm has the property rights, what Pigouvian tax (levied on each unit of the
good) would correct the externality?
(a) 10.
(b) 20.
(c) 30.
(d) 40.
(e) none of the above.
THE END