ECON 5050 Practice Exam 1 (W&W chapters 1,2,3,10,11,12,13,14 &ERP chapters 4,5,6)

PADM 5006 Exam 1 Fall 2009

Use separate sheets of paper as needed to answer. Please be sure to put your name on your answer sheets, the part of the exam you are answering, and the number of the question you are answering. When done staple together all your answer sheets with this copy of the questions on front and hand them in.

Part I (60 points): Please briefly explain your responses.

1. In Michigan the Liquor Control Commission was concerned that rising liquor prices would reduce liquor sales and thus liquor sales tax revenues so they decided to freeze the prices allowed. So for example the maximum legal price in Michigan for a bottle of vodka would be $12. (Grand Rapids Press Aug. 25, 2009,

Do you see any problem with their strategy? Include a demand & supply sketch in your answer.

2. Do you consider SequoiaNational Park a public good (or near public good)? Why or why not?

3. What are some of the major criticisms of the definition of the poverty line used in the U.S.?

4. According to the FDA eating about 2 tablespoons of olive oil a day instead of saturated fat can reduce the risk of heart disease. Studies have also found olive oil can lower cholesterol, blood pressure, and blood sugar and reduce the risk of colorectal, breast, prostate, pancreatic, and endometrial cancer. Suppose the California Olive Oil Council (COOC) argues that since olive oil clearly provides significant positive externalities your government agency should provide subsidies for olive oil producers. Please respond to their argument for funds from your budget.

5. What is a shadow price and why would you use a shadow price?

6. Whats the difference between a social insurance program and an income redistribution program? Please give an example of each and explain how the justifications differ.

Part II (40 points): Please explain your responses fully.

1. In some areas of Texas uranium is in rock that lines fresh water aquifers. These aquifers are used for drinking and irrigation water. Some uranium mining techniques drill into this rock and use injections that free metals such as uranium and arsenic into the water. If consumed uranium can cause cancer, kidney damage and may adversely affect reproduction and fetuses. Based on the Coase Theorem, why might it be desirable for the government to be involved in this issue? What are some of the advantages and disadvantages of the 5 usual alternative approaches to dealing with externalities in terms of this case?

2. a) What is Social Security?

b) How does Social Security work?

c) Why are some problems with Social Security anticipated?

d) What are some alternatives for dealing with these problems?