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 2006

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 all your answer sheets and your exam together and hand them in.

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

1. In a recent email discussion linked to the Modesto Bees Hive concerns over the rise in the cost of housing in the Modesto area lead to the following comment maybe I'll run for city council and push for a cap on home prices. Do you see any problems with this idea? (Please include a demand & supply sketch.)

2. Do you consider local police services 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. Recent studies have found numerous health benefits to almonds. Almonds are high in protein, vitamin E, magnesium, fiber, potassium, calcium, phosphorus and iron. They help satisfy hunger and may reduce bad cholesterol, lower the probability of heart disease, stroke, and other chronic diseases. The majority of the worlds almond supplies are grown here in the valley. Do almonds provide significant enough positive externalities that we should provide substantial subsidies for buying almonds?

5. Some community services are understaffed. A suggestion is made to require all citizens to contribute 10 hours per month of their time to providing community services. It is argued this will make it possible to undertake many more community projects and reduce taxpayer costs since the labor will be essentially free. You are evaluating this proposal, in conducting your study how would you evaluate the costs of the labor? In your answer please also comment on the difference between on-budget costs and social costs.

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 and show your work.

1. Around this time of year many people enjoy lighting a fire in the fireplace and gathering the family around to celebrate the holidays. According to an article in the Modesto Bee Tiny flecks of soot and ash from wood fires add to the region's chronic particle pollution. Medical researchers have linked particle pollution to lung disease, heart problems and premature death. (Modesto Bee 11/1/06, Why might it be desirable for the government to be involved in this issue? (Hint: please relate this issue to the Coase Theorem.) How could public policy be used? What are some of the advantages and disadvantages of alternative approaches?

2. The city you work for is considering installing a pond with a fountain that will add beauty to the community and also reduce the probability of flood waters getting into local residences and businesses. The pond with fountain will cost $10 million to install and $10,000 a year for maintenance. Fortunately, with proper maintenance the pond and fountain are expected to last forever. For each of the 1,000 large businesses in the area the expected value of the flood reductions will be approximately $25 per year. About 100,000 residents will each benefit from the beauty and reduced likelihood of flooding by approximately $10 each per year. The interest rate is 10%.

A) What is the approximate present value of the projects costs? What is the approximate present value of the projects benefits? What is the approximate net present value of the project based on the data you have? Is the project admissible?

B) Suppose the maintenance cost estimates and benefit estimates were in current dollars and the interest rate of 10% was in nominal terms. Your analysis suggests expected inflation is 6%. How would your estimates of the approximate present value of the projects costs, benefits, and net present value change?

C) If the pond and fountain would only last for three years even with the maintenance, what would be the approximate present value of the projects costs?

D) There is another project that would provide a net benefit of $20 each to a different group of 200,000 people immediately, but is unlikely to be provided in the absence of government intervention. Unfortunately, due to insufficient budget and political will you can only do one of the projects. Comparing the project described in A) and this project, in the absence of any other information about the people involved, which project should be preferred and why?

E) What "distributional weight" would make you indifferent between the original project in part A) and this new project?