Final Exam Business Economics

General Management MBA 3

April 17, 2017
Instructor: Yudo Anggoro, Ph.D

Part I (20 Points)

1. What is willingness to pay? Why is it so difficult to reveal peoples true willingness to pay?
2. What is the basic difference between using a subsidy to induce producers to install antipollution
equipment and a tax on producers who pollute?
3. In the late 1960s, George Akerlof wrote The Market for Lemons, the paper that later won him a
Nobel prize. He explained how information asymmetry between buyers and sellers could kill the
market, using used-car market as an illustration. In reality, however, we see that used-car market is
thriving, not collapsing, at least to date. Does this mean that Akerlofs explanation is wrong? Explain
your argument.
4. In order to drive up Indonesias economic competitiveness, the government attempts to develop
new growth centers around the country to generate economic activities. The new growth centers
are located in Sei Mangke, Bintuni, Morotai, etc. How do you see this policy, what are the strengths
and weaknesses of this policy?

Part II (80 Points)

1. In East Jakarta, the marginal benefit associated with pollution cleanup is MB = 300-10Q, while in
West Jakarta, the marginal benefit associated with pollution cleanup is MB = 200-4Q. Suppose that
the marginal cost of cleanup is constant at $XX per unit, where xx is the last two digits of your
students ID. What is the optimal level of pollution cleanup in each of the two regions? Draw the
curve.

2. When demand is estimated to be p = 60 0.5q, calculate the loss in consumer surplus when a tax
drives price from $1 to $5. Draw the curve.

3. See Figure below. If the price is $8, then what is consumer surplus? What is consumer surplus at a
price of $10? How much is the deadweight loss due to the change of price from $8 to $10?

Price

$30

$10

$8

100 110 Quantity

1
4. Graph the following supply and demand curve:
Supply: P = 10 + 0.4Q
Demand: P = 50 0.4Q
What is the equilibrium price and quantity? How much are producer surplus, consumer surplus, and
total surplus?
Suppose the government levy $8 tax per unit to producer, draw a new supply curve that represents
the marginal cost to society. Calculate the new consumer surplus, new producer surplus, tax
revenue, and excess burden.

5. Suppose that a firms marginal production costs are given by MC = 10+3Q. The firms production
process generates a toxic waste, which imposes an increasingly large cost on the residents of the
town where it operates. The marginal external cost associated with the Qth unit of production is
given by 6Q. What is the marginal private cost associated with the 10th unit produced? What is the
total marginal cost to society associated with producing the 10th unit (the marginal social cost of the
10th unit)?

6. Suppose the demand for a product is Q = 1200-4P and supply is Q = -200 + 2P. Furthermore, suppose
that the marginal external damage of this product is $8 per unit. How many more units of this
product will the free market produce than is socially optimal? Calculate the deadweight loss
associated with the externality. Draw the curve.

7. The private marginal benefit associated with a products consumption is PMB =360-4Q and the
private marginal cost associated with its production is PMC = 6Q. Furthermore, the marginal
external damage associated with this goods production is MD = 2Q. To correct the externality, the
government decides to impose a tax of T per unit sold. What tax T is set to achieve the social
optimum?

8. Two firms are ordered by the government to reduce their pollution levels. Firm As marginal costs
associated with pollution reduction is MC = 20+4Q. Firm Bs marginal costs associated with pollution
reduction is MC = 10+8Q. The marginal benefit of pollution reduction is MB = 400-4Q.
a. Draw the curve and what is socially optimal level of each firms pollution reduction?
b. Compare the social efficiency of two possible outcomes: (1) require all firms to reduce pollution
by the same amount; (2) charge a common tax per unit of pollution.