The local MBA association is holding a fundraising effort to
UMUC Economics Worksheet
QUESTION 10.2 The local MBA association is holding a fundraising effort to buy one or more big-screen television sets for the student lounge. Currently the student lounge is freely available to all MBA students. They poll MBA students and find that first-year students are willing to pay, on average, $5 each to place one television set in the lounge, $3 each for a second television set and $1 each for a third television set. Second-year students are only willing to pay $3, $2, and $1 each for the first, second, and third television sets (after all, they’ll be leaving shortly). Assume that there are 200 first-year students and 200 second-year students and that a big screen television set costs $1000.
a. How many television sets should the MBA association buy? N Will the association be able to collect this amount? Explain.
QUESTION 10.3 The state of Maryland is concerned about the crab population in the Chesapeake Bay. Every time a firm catches a crab and removes it from the crab population, they are reducing the ability of crabs to reproduce for future generations. The state has determined that if market forces were to act by themselves, too many crabs would be harvested. Therefore, the state of Maryland is considering imposing a tax to solve this problem and reduce the catch by 20%.
a. Currently, the price of a crab is $5 each. Assuming that the own-price elasticity of demand for crabs is -0.5, what should the new market price be once the tax is imposed? N
b. Will this tax be equal to the difference in market price? Explain.
C. As an alternative to the tax, the state of Maryland is considering requiring every firm to reduce the quantity of crabs they catch by 20%. If every firm complies in the short-run, what will be the new price of crabs (i.e., no tax, but a catch reduction)? N Will the firms be making more or less profit selling crabs compared to part a.?
d. In the long-run, will this second proposal solve the externality? Explain.
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