Gianmarco Ottaviano London School of Economics EC102 - Economics B MT Microeconomics

Moodle Test 10 (Lectures 19 & 20)

Question 1: Consider a penalty shoot-out with three choices for the kicker and the goalie: right, left or middle. An outcome in which each player goes right 40 per cent of the times is: a) An equilibrium in pure strategies b) An equilibrium in mixed strategies c) Not an equilibrium in either strategies

Question 2: The London tube is one of the busiest undergrounds in the world. Whenever a commuter takes the tube during rush hours, the congestion increases. During rush hours an externality is present because: a) The tube is a monopoly b) The tube is not properly managed c) There is a missing market Question 3: Consider the following figure representing a situation in which air is polluted by a steel mill and this damages a forestry firm:

S is supply, D is demand, SMC is social marginal cost, PMC is private marginal cost, MD is marginal damage. At the level of steel output X0 there is: a) Too much pollution because SMC is below D b) Too little pollution because SMC is above PMC c) Too much pollution because SMC is above MD d) Too little pollution because SMC is below D

Question 4: Consider the following figure representing a situation in which air is polluted by a steel mill and this damages a forestry firm:

S is supply, MR is marginal revenue, SMC is social marginal cost, PMC is private marginal cost, MD is marginal damage. If the steel mill is price taker and the ownership of clean air is assigned to the forestry firm, the largest bribe the steel mill would be willing to pay for permission to produce more than X* is: a) More than enough to convince the forestry firm to give permission b) Just enough to convince the forestry firm to give permission c) Not enough to convince the forestry firm to give permission Question 5: From time to time, used hospital waste, such as hypodermic needles from unknown hospitals, wash up on beaches. This creates an externality imposed on the public by the hospitals in terms of dirty water and unsafe beaches. In this case the Coase Theorem: a) Would lead to the correction of the implied externality b) Would not lead to the correction of the implied externality Question 6: If each pack of cigarettes smoked creates 68 pence of externalities borne by other members of society (in terms of the costs of cigarette smokers excess use of health 2

services, of foetal death, and of second-hand smoke), the situation can be corrected by a Pigouvian of: a) 68 pence b) 32 pence c) 34 pence d) 16 pence