Posted: January 31st, 2023

# ECON3128/ECON6040 Practice Midterm Exam

ECON3128/ECON6040 Practice Midterm Exam

Note:

1. Your mid-term will contain two parts. In the first part, you will have 35 minutes to complete

some MCQs and short answer questions. You will need to complete the first part answering all

questions on the wattle quiz. In the second part of the exam, you will have 55 minutes to

complete some problem solving questions handwritten on paper and upload the scanned

pages. Note that there will be a short break between the two parts of the exam. (for more

detailed information see the “Pre Midterm Festivities” Handout in the Midterm Preparation

section)

2. Answers to the practice exam will be released in the 2nd week of the teaching break. To make

the most out of the practice exam, we strongly encourage you to attempt the questions before

you see the answers.

Part One

MCQs

The MCQs in your mid-term will be similar to what you have seen in your quiz (covering all

content from the first 6 weeks of the semester).

Short Answer Questions

Q1: Consider a fishery

(a). Explain why profits of individual fishers differ in open-access equilibrium and

social optimal equilibrium?

(b). Explain why open-access equilibrium isinefficient using the concept of externality.

Q2: How is wage-risk analysis used to estimate the value of a statistical life? What are potential

problems with wage-risk analysis?

Part Two

Problem Solving

Q4. Suppose that a wood pulp mill is situated on a bank of the Murrumbidgee River. The private

marginal cost and marginal benefits of producing wood pulp is given by the function

The production Y is measured in tons. For every ton of wood pulp production, the downstream

Wagga Wagga community suffer $10 loss from the polluted water (all prices could be thought of as

millions of dollars to be more realistic but for simplicity we just call it dollars)

(a) What is the profit-maximising output of wood pulp without any regulation? What is the

social benefit maximising output of wood pulp?

(b) Draw a diagram illustrating the market. Remember to label everything: marginal cost

(MC), marginal benefit (MB), social marginal cost (SMC) functions, name the axes

and mark your answers to part (a).

(c) Calculate the net social benefit at profit-maximising output level without regulation and

social benefit maximsing output level

(d) Name and discuss two solutions that can achieve social benefit maximising output level.

Q5 We are concerned with only two generations. The demand and supply functions for oil

in the present generation are given by:

where Q is expressed in millions of barrels and P is the price per barrel. There is a total of 100

million barrels of the resource available.

(a) Draw a supply-and-demand graph showing the equilibrium price and quantity

consumed in the current generation in the absence of any consideration of the future.

Remember to label all axis, lines, and important intersections (equilibrium) in your

graphs. Solve for the equilibrium price and quantity algebraically.

(b) Draw a graph showing the marginal net benefits from consumption in this period at all

levels of consumption up to the equilibrium level. Express the marginal net benefit

function algebraically.

(c) Suppose that the marginal net benefit function is expected to be the same for the next

generation. The discount factor is 1/4. Calculate the efficient allocation of resources

between the two generations and show this graphically. (You can extend your graph

from part b. Again name axis and functions and mark the equilibrium.)

(d) What is the appropriate resource depletion tax in the first period?