Problem Set 9 March 18 & 19 University of Michigan Winter 2010 Economics 101 Microeconomics Econ 101.400 Winter 2010 Question One How does the University of Michigan allocate spaces in its freshman class? At current price of education at the U of M, is there excess demand or excess supply for a Michigan undergraduate education? Do you think that entry into the University of Michigan freshman class is granted only to those applicants with the highest valuations? Do you think University of Michigan education is inefficiently allocated? If you were to question the University administrators, what do you think they would say? Do you think they would feel the allocation of the University?s education is inefficient? Purely on efficiency grounds, do you think there is any reason to use criteria other than willingness?to?pay to allocate spaces in the incoming freshman class? Question Two Faculty members at a large state university in the mid?west complain often about the University?s priorities. Thanks to television deals, ticket sales and merchandising, the football program generates a huge amount of revenue: but none of it finds its way back to the rest of the university. Instead, the revenues generated by the football program are spent only by the football program. Faculty members believe that the successful football program should subsidize the academic goals of the institution. What do you think? Suppose that you researched the issue, and discovered that applications to the university rise significantly, the average quality of admissions rises significantly and donations to the university rise significantly in years in which the football team is very successful. Does this make a difference to the way you feel about how football revenues should be allocated? Could you make an argument that the rest of the University should further subsidize the football program? Question Three The Federal government levies a tax on gasoline sales of roughly $0.18/gallon. In addition, state governments levy gas taxes as well: most of these lie in between $0.20/gallon and $0.30/gallon. This means that, in most states, taxes account for roughly $0.40 to $0.50 of the price or a gallon of gas. Harvard economist Greg Mankiw argues in favor of raising the federal tax on gas by around $1.00. Can you think of any externality?related justifications for raising the Federal tax in this way? Econ 101.400 Winter 2010 Question Four Consider the diagram below, depicting demand and supply for a particularly sophisticated type of widget. Suppose that every time one of these widgets is purchased, the widget spontaneously produces a spectacular fireworks display that is enjoyed by all of the people in the immediate neighborhood. Each of these fireworks displays is estimated to provide thrills and excitement for the onlookers (not including the purchaser) that would otherwise cost $100 to provide. Thus the external benefit generated by the sale of the marginal widget is $100, regardless of how many widgets are purchased. (a) In the diagram, show the marginal social benefit curve, and identify the efficient quantity of widgets produced. (b) If the rights to observe the fireworks displays are not enforceable or tradable, how many widgets do you think will be produced? Shade the deadweight loss from such an outcome on your diagram. (c) Can you think of circumstances in which private negotiations might lead to the internalization of the externality? Explain what we should expect to observe if such negotiations were fruitful. (d) If private negotiations were unlikely to be effective, could you suggest a remedy that the government could impose that would enhance the efficiency of the market? $500 500 $250 250 Demand Supply chadh Microsoft Word - Econ 101 Winter 2010 Problem Set 9.doc
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