Homeowork 4 Due in 7-8 hours EC: Principles of Economics, Spring 202 Homework 4 Guidelines: In preparation for doing this assignment, go over the lecture

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EC: Principles of Economics, Spring 202

Homework 4

Guidelines: In preparation for doing this assignment, go over the lecture slides, read the relevant e-book chapter from The Economy, and answer all questions in each section of the chapter we discussed in class. Please note that each possible answer of the multiple choice questions (MCQs) has an explanation attached to it. Use those to expand your understanding.

In your follow-up seminar you can ask and discuss those questions you found particularly difficult.

This is one of the 10 weekly assignments in this term. Two (2) will be randomly selected from the Spring Term for marking (one from each half of the term). If chosen, this assignment will carry a 5% weight towards your final mark.

Should it become apparent that there are no acceptable reasons for your non-submission of homework, you may be issued with a formal warning which can escalate to the termination of your registration at the College.

Your assignment: Write down your answers in Word document, convert to PDF if you can, and submit your work in Turnitin in Moodle by clicking on the relevant submission link. The deadline is 23:59 h by Sunday 6th February. After that, it will not be possible to submit. The heading of the submitted document needs to include your full name and student ID number. Your submission needs to be in a single file. If you need to draw graphs I encourage you to use the Shapes Tool in WORD (found under INSERT), to make your own drawings.

Marks are indicative for how much time and writing you should allocate among questions.

Question 1

For each of the following goods or bads, decide whether they are rival and whether they are excludable, and explain your answer. If you think the answer depends on factors not specified here, explain how. (4 marks each)

1. A free public lecture at a university held in a lecture theatre

2. Noise produced by aircraft around an international airport

3. A public park

4. A forest used by local people to collect firewood

5. Bicycles available for the public to hire and travel around a city

(total 20 marks)

Question 2

Imagine a beekeeper, who produces honey and sells it at a constant price per kilogram. (10 marks each)

1. Draw a diagram with the quantity of honey on the horizontal axis, showing the marginal cost of honey production as an upward-sloping line, and the price of honey as a horizontal line. Show the amount of honey that the profit-maximizing beekeeper will produce.

2. For the beekeeper, the marginal private benefit of producing a kilo of honey is equal to the price. But since the bees benefit a neighbouring farmer, by helping to pollinate her crops, honey production has a positive external effect. Draw a line on your diagram to represent the marginal social benefit of honey production. Show the quantity of honey that would be Pareto efficient. How does it compare with the quantity chosen by the beekeeper?

3. Explain how the farmer and beekeeper could both be made better off through bargaining.

(total 30 marks)

Question 3

A residential community has 100 residents who are concerned about security. The accompanying table gives the total cost of hiring a 24-hour security service as well as each individual resident’s total benefit.

Quantity of Security Guards

Total Cost (£)

Total Individual Benefit to each Resident (£)

0

0

0

1

150

10

2

300

16

3

450

18

4

600

19

Explain why the security service is a public good for the residents of the community. Determine whether an individual resident acting on his own, will be able to hire and pay for security guards, and compare with the situation where all 100 residents make a group decision to hire security guards. (Hint: Calculate marginal costs and marginal benefits).

(total 30 marks)

Question 4

What type of externality is produced in each of the following below? Explain why there is market failure in each case. (10 marks each)

1. I grow many colourful flowers in my front yard.

2. I buy a big diesel SUV.

(total 20 marks)

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