Prof. Bryan Caplan

bcaplan@gmu.edu

http://www.bcaplan.com

Econ 849

Fall, 2001

 

HW #1 (please type all answers)

 

1. (1 page, double-spaced) Analyze the Kaldor-Hicks efficiency consequences of FCC regulation of indecent/obscene language on commercial television relative to laissez-faire. Carefully distinguish costs, benefits, transfers, and deadweight costs.

 

2. The Queen holds on auction on the monopoly right to produce and sell tea. There are two available producers of tea. The demand curve for tea, and the costs of the two producers (Lancaster and York), are given in this table:

Price per ton

Quantity (tons)

Total Revenue

Total Cost of Lancaster

Total Cost of York

1000

1000

1,000,000

400,000

500,000

900

1500

1,350,000

600,000

750,000

800

3000

2,400,000

1,200,000

1,500,000

700

3200

2,240,000

1,280,000

1,600,000

600

3400

2,040,000

1,360,000

1,700,000

500

3600

1,800,000

1,440,000

1,800,000

400

3800

1,520,000

1,520,000

1,900,000

300

4000

1,200,000

1,600,000

2,000,000

200

4200

840,000

1,680,000

2,100,000

A. If Lancaster received the monopoly privilege, what price and output level would he set? What would his (gross) monopoly profits be?

B.                 If York received the monopoly privilege, what would his price, output, and (gross) monopoly profits be?

C.                 If the Queen auctioned off the monopoly privilege to Lancaster and York, who would win the auction? How much would the winner pay? (Assume the Queen starts at a low price and rises it by a penny at a time until one bidder drops out).

D.                 Are there any losses to productive efficiency from this grant of privilege? To allocative efficiency? Why?

E.                 Suppose the Queen, sensitive to the charge that she is enriching herself with these auctions, randomly selects the recipient of the grant (by making Lancaster and York publicly play Rock, Paper, Scissors, for example). How are the deadweight losses of monopoly likely to be affected?

F.                  Parliament strips the Queen of the right to give monopolies, and declares that henceforth monopolies will be awarded to whichever firm gets the most votes from the members of Parliament. Lancaster and York compete for votes by paying for political advertising for their supporters, hiring lawyers, and so on. Who, if anyone, now benefits - on net - from the distribution of monopoly grants?

 

3. Suppose that you are narrowly self-interested, risk-neutral, require an hour to vote, and value your time at $100/hour. Bush is $1000 better for you than Gore, and people other than yourself vote for Bush with p=.505. Using the probability of decisiveness formula from the notes, calculate the critical number of voters (2n+1) that leaves you exactly indifferent between voting and not voting.

 

4. Use diagrams to contrast the deadweight loss from laissez-faire supply of (a) a good that is perfectly non-rival but fully excludable, and (b) a good that is fully rival but perfectly non-excludable.

 

5. Suppose there are seven workers. The PDV of their lifetime labor is as follows:

Worker #

1

2

3

4

5

6

7

$ PDV

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,500,000

Employers cannot tell how productive a worker is, but they CAN tell whether a worker has a college degree, and they know the AVERAGE value of workers with and without college degrees. Competition forces them make worker pay equal their average PDV.

A.                What will the PDV of lifetime earnings be for workers with and without college educations be if...? Fill in the following table.

 

(Hint: What is [1M+1.2M+1.4M+1.6M+1.8M+2M+2.5M]/7 ?)

Worker #'s w/ College Degrees

Without College PDV

With College PDV

College Premium

1-7

--

$1,642,857

--

2-7

$1,000,000

$1,750,000

$750,000

3-7

 

 

 

4-7

 

 

 

5-7

 

 

 

6-7

 

 

 

7

$1,500,000

$2,500,000

$1,000,000

B.                Suppose you are worker #4. Workers #1-3 don't have college degrees; workers #5-7 do. What is your PDV of earnings without a college degree? With a college degree?

C.                What are the total earnings of the other workers if you (still worker #4) get a college degree? If you don't?

D.                Suppose worker #4's college costs $500,000 total. What is the net gain of college to worker #4? The net gain to all seven workers?

E.                Are there externalities of education in this problem? Explain.

 

6. In a given market:

 

Supply is given by: Q=aP

Demand is given by: Q=c-dP

Social Benefits are given by: Q=c/2-dP

 

What is total surplus at the intersection of Supply and Demand? At the intersection of Supply and Social Benefits? Prove that total surplus is maximized at the intersection of Supply and Social Benefits. Illustrate your answers with diagrams.