Write your name: ____________________________, your ID#_____________________

University of Colorado at Boulder, Spring 1999, Environmental Economics, Econ 3545

There are 25 questions in this test, each of equal weight. Attempt all questions.

1. Lisa flew to Kansas City from Denver spending $170 on airfare and other incidental expenses. She could have gone to Kansas City on a rented car, which would have cost her only $100 for rent, insurance, fuel, and other expenses. However, the car would have taken additional 10 hours of travel time to reach the destination. She does not care for relative comfort of air travel. Lisa’s choice of flying, instead of driving, to Kansas City reveals that her value of time is at least

1. $6 an hour.
2. $7 an hour.
3. $8 an hour.
4. $9 an hour.

1. I am an electrician working in daily wages of $160 a day. Today, I decided to take the day off and rest at home. The opportunity cost of taking the day off is

1. $0 to me and also $0 to society.
2. $0 to me, but $160 to society.
3. $160 to me, but $0 to society.
4. $160 to me and also $160 to society.

1. Which one is correct?

1. A policy, compared to all other alternative policies, is cost-effective if it minimizes total cost of achieving a given objective.
2. A policy, compared to all other alternative policies, is cost-effective if it maximizes total net benefits.
3. A policy, compared to all other alternative policies, is cost-effective if it minimizes total cost and also maximizes total net benefits.
4. None of the above is correct.

1. Let the total weight of raw materials and energy inputs that an economy withdraws from the environment be M tons in a year. Let the total weight of residuals that this economy throws back to the environment be R tons in a year. According to the materials balance concept,

1. W=R.
2. W>R.
3. W<R.
4. there is no relationship between W and R.

1. Sources of emissions that can be easily identified are called

1. local sources.
2. regional sources.
3. point sources.
4. nonpoint sources.

1. Economics approach is called anthropocentric because

1. it compares benefits and costs of an action to human beings only.
2. it compares benefits and costs of an action to human beings and to other living entities.
3. it considers any environmental degradation from an action unacceptable, irrespective of the magnitude of benefits associated with the action.
4. it considers any environmental degradation from an action acceptable, if there is even little benefit associated with the action.

1. The law of demand states that

1. at a higher price, people buy higher quantity of a commodity.
2. at a lower price, people buy lower quantity of a commodity.
3. at a lower price, people buy higher quantity of a commodity.
4. at a higher price, people may buy higher or lower quantity of a commodity.

1. The law of supply states that

1. at a higher price, sellers sell higher quantity of a commodity.
2. at a higher price, sellers sell lower quantity of a commodity.
3. at a lower price, sellers sell higher quantity of a commodity.
4. at a lower price, sellers may sell higher or lower quantity of a commodity.

1. A downward-sloping demand curve implies that a person has to be offered a lower price for her to be willing to buy a larger quantity of a commodity. The underlying reason behind this buying behavior is

1. the materials balance concept.
2. the anthropocentricity of economics approach.
3. the law of increasing opportunity cost.
4. the law of declining marginal benefits.

1. Individual residents of a city may differ in their willingness to pay for the same level of improvement in environmental quality of the city. This difference in willingness to pay can be attributed to

1. different income levels of residents.
2. different preferences of residents for environmental quality.
3. different levels of education or awareness among residents about environmental quality.
4. all of the above.

1. Which one is correct?

1. Market demand of a private good is the vertical summation of individual demand curves.
2. Market demand of a public good is the horizontal summation of individual demand curves.
3. Market demand of a private good is the horizontal summation of individual demand curves.
4. Market demand of a private or public good is the vertical summation of individual demand curves.

1. Which one is correct?

1. Social marginal willingness to pay (MWTP) curve is always different from the market demand curve.
2. Social MWTP curve is always the same as the market demand curve.
3. Social MWTP curve is different from the market demand curve in the presence of positive externality.
4. Social MWTP curve is the same as the market demand curve in the presence of positive externality.

1. Which one correctly distinguishes between efficiency and cost effectiveness?

1. Efficiency is minimization of total cost, whereas cost-effectiveness is maximization of total net benefits.
2. Efficiency is both minimization of total cost and maximization of total net benefits, whereas cost-effectiveness is only minimization of total cost.
3. Cost-effectiveness is minimization of total cost, whereas efficiency is maximization of total net benefits, whether total cost is minimized or not.
4. None of the above is correct.

1. According to the equimarginal principle, the total cost of producing 1,000 units of an output from two plants, Plant A and Plant B, is minimized when

1. marginal cost at Plant A = marginal cost at Plant B.
2. # of units produced at Plant A = # of units produced at Plant B.
3. # of units produced at Plant A + # of units produced at Plant B = 1,000.
4. Both a and c have to be satisfied.

1. In an unregulated market, paper mills discharge toxic wastes into rivers, creating health hazard to people and denying them recreational benefits of rivers. In this market, the output of paper

1. will exceed the efficient level of output.
2. will fall short of the efficient level of output.
3. will be equal to the efficient level of output.
4. may or may not be equal to the efficient level of output.

1. A public good is a good that has the following characteristics.

1. Those who do not pay can be denied the consumption of the good.
2. Those who do not pay cannot be denied the consumption of the good.
3. The good if consumed by one, is not available to another person for consumption.
4. Both a and c are correct.

1. According to the simple model of pollution control presented in the class, the efficient level of emissions is where

1. total damages = total abatement costs.
2. total damages = marginal abatement costs.
3. marginal damages = total abatement costs.
4. marginal damages = marginal abatement costs.

(Note: There should be a graph here, which I could not reproduce in the html version of this file. So, I am providing instructions for you to draw the graph and then answer the following three questions. Label the horizontal axis of a graph as Emissions (tons per week). Label the vertical axis as $. Label the origin as 0. Draw an MAC curve that cuts the horizontal axis at point c and an MD curve that starts from point a in the horizontal axis. Draw a vertical line from the point of intersection of MAC and MD to the horizontal axis. Label the point where this vertical line meets the horizontal axis as point b.)  

Use the above graph (a simple model of pollution control) to answer the next three questions.

1. The uncontrolled level of emissions is

1. Point a.
2. Point b.
3. Point c.
4. Point 0.

1. The threshold level of emissions is

1. Point a.
2. Point b.
3. Point c.
4. Point 0.

1. The efficient level of emissions is

1. Point a.
2. Point b.
3. Point c.
4. Point 0.

1. Below is a graph for a case of negative externality. In this case, the market level of output (Q_m) exceeds the efficient level of output (Q_e). Shade the area of welfare loss due to excess production.

(Note: Here too I could not reproduce the graph. Draw a graph and label the horizontal axis as Q and the vertical axis as $. Draw a downward-sloping demand curve and label it as D=social MWTP. Draw an upward-sloping supply curve and label it as S=Private MC. Draw a line above and parallel to the supply curve and label it as Social MC. Draw a vertical line from the intersection of Social MC and the demand curve to the horizontal axis and denote the point as Qe in the horizontal axis. Also draw a vertical line from the intersection of the supply curve and the demand curve to the horizontal axis and denote the point as Qm in the horizontal axis. Extend this vertical line upward up to the Social MC curve.)

2. The practice of comparing benefits and costs of all alternative actions and choosing the alternative that maximizes __________________ is called "economizing behavior" or "rational decision making."
3. The materials balance concept implies that an economy needs to withdraw fewer amounts of virgin raw materials and energy from the environment if it wishes to reduce the amount of residuals thrown into the environment. We discussed three possible methods of doing this; mention any one of those three methods.

__________________________________

  

Emissions (tons/week)	Total damages, $
10	4,000
20	10,000

4. The above table shows total damages in a city at different levels of emissions from manufacturing plants in the city. What is the marginal damage per ton when emissions increase from 10 tons to 20 tons per week? __________________

Quantity Units	Marginal Cost at Plant A, $	Marginal Cost at Plant B, $
1	5.00	4.0
2	5.50	5.50
3	6.00	6.50
4	6.50	7.50
5	7.00	8.50
6	7.50	9.50

 

5. The above table shows marginal costs of production at Plant A and Plant B of a firm. The firm will minimize the total cost of producing 10 units of output by producing ___ units in Plant A and ___ units in Plant B.

 Note: I have accepted both B and C as correct answers to Question 13, because these two options could have been more clearly worded to bring out the difference between cost-effectiveness and efficiency. Options A and D are obviously wrong answers.