Correct answers only..
1. Explain why it is difficult to estimate the value people place on environmental goods, the benefits they receive from cleaner air and other services of nature. 2. Why is there a trade-off between environmental quality and other forms of consumption (p. 290)? Also, what is the difference between other public goods such as national defense and wilderness (p. 291)? 3. Define marginal willingness to pay for clean air (p. 292). Also, distinguish between marginal willingness to pay and total willingness to pay (p. 293). 4. Distinguish between use and non-use value (p. 295-296). 5. What is the difference between an ordinary demand curve and a compensated demand curve (p. 298-301)? Define an expenditure function (p. 301-302). What does the area under a compensated demand curve measure (p. 302)? 6. What do we mean by restricted demand curve or a restricted expenditure function (p. 305-306)? Explain how we can use a restricted demand curve to estimate the marginal willingness to pay for an improvement in air quality (p. 306). (This question is important.) 7. Distinguish between the equivalent surplus and a compensating surplus associated with an increase in the quality or quantity of the environment. 8. Chapter 16: Hedonic Price Methods. We did not deal with much of the first part of this chapter. However, you should know that changes in land values following an improvement in environmental improvement accurately measure the benefits associated with environmental quality only under very special circumstances (see p. 315 for an example). 9. You should know what is to know about the effects of climate on land values (p. 317 and 321). 10. The important point about hedonic price theory is that the measured market relationship between the price of land and air quality represents a series of equilibriums between the demand for housing at a particular location and the supply of housing at a particular location (p. 324-327). As p. 329 indicates the hedonic price function is not a demand function. It simply indicates how housing prices change when characteristics change. You should be able to explain how investigators went about estimating a demand curve or the willingness to pay for air quality in Boston. This consists of a two-stage procedure described on p. 328-329. For the results, see p. 292. 11. Page 330 discusses how the value of a statistical life is estimated. You should know this. 12. Household Production. One example of this approach to measuring benefit is by measuring defensive expenditures (see example on p. 337-381). The basic idea is quite simple. If external noise is present, I will undertake defensive expenditures to maintain a tolerable noise level inside. If the external noise outside increases and I increase my defensive expenditures so as to maintain the indoor noise level at the same level, the increase in expenditure is a true measure of the cost of an increase in external noises. But see the discussion on why the individual will in general allow the internal noise level to deteriorate a bit following an increase in external noise.2. {i} (ii) (iii) Explain the concept of opportunity loss, and show that the minimum opportunity loss is equal to the Expected Value of Perfect Information. The failure rate in a particular examination is estimated to be 40%. Construct a table showing the probabilities of l}, I, 2 . . . 5 students failing in a sample of ve. 150 graduate entrants are due to take their rst professional accounting exam at the Institute of Certiahle Accountants. The probability distribution for the failure rate is mtimated in the following table: Failure rate Probability 0.1 {1.1 0.2 {1.2 {1.3 {1.3 [1.4 0.3 [15 0.11 Each failing student is entitled to a 10 refund on professional fees. The Institute's senior tutor is condent that she could ensure a failure rate of [1.1 by holding an intensive revision course, at a cost to the Institute of Bill]. Advise the Institute on whether the revision course should take place. A tutorial test of ve students resulted in no failures. Use this information to revise the failure rate probability distribution, and hence reassess the revision course. 3. 1Illespite being a small local shopkeeper I can always heat the price that Woolworths charge for the same product. Woolworths must pay rent on its store while I own my shop and have no rent to pay.' Discuss. 4. A rm keeps a record of sales and prices over the past seven months, resulting in the following table: Prim {'tonj Sales (tons) Nov. 1935 v.5 34.5 Dec. 3.0 32.0 Jan. 1930 3.0 34.0 Feb. 12 92A] March 1.0 95.0 April 3.0 92.0 May 3.5 91.5 Use these observations to estimate demand as a linear function of both price and time. Utilise this function to estimate demand for the following month. on the assumption that: (a) price remains unchanged, (h) price increases to when. 5. Critically assess the methods used to generate empirical estimates of both short- and long-run cost functions. Do the empirical difculties encountered rob the resulting estimates of any general operational utility? ti. 'Ahout half of all advertising expenditure is wasted. The problem lies in knowing which half.' Discuss this statement and assess the useful- ness of managerial models of advertising allocation decisions. 7:". Analyse the effects of an increase in interest rates on the investment activity of a prot maximising rm. Does it matter if ination increases in proportion to the increase in interest rates? 3. (a) Show that an increase in the unit value of stock will lead to a less than proportionate fall in the optimum amount of stock held. What assumptions underlie your answer? (1)) A rm faces a uniform annual demand of moms units. The purchase cost of stock is 10 per unit, whilst the cost of ordering stock is 20, and the cost of holding stock is 14% of the average stock value. Find the Economic Order Quantity and the Mini- mum Acquisition Com. How are your answers affected by: (i) the fact it takes two weeks between placing an order and stock arriving; (ii) the offer of a 1% discount off the purchase cost if stock is ordered in lorry loads of 1'? one units. 9. \"The market allocates resources to the rms that best meet the needs of consumers.' Discuss. 10. 'The force of competition. the desires of managers and the needs of shareholders combine to ensure that rms maximise prot.' Discuss. 9. (a) Briey analyse the effect of an increase in interest rates on the investment portfolio of a prot maximising holding company. 0)} The University is contemplating building a new squash court, adjacent to its new hall of residence. To secure local support for its planning application, the University has offered to open the court to local players at student rates for the rst ve years. After ve years, the University can charge what it likes for the courts. Consequently, the University estimates that net revenue from the court will be 1000 for each of the rst ve years, rising by 10% (compounded) in each of the sixth to tenth years. In the eleventh and twelfth years rising maintenance costs will com- pletely offset rising fees so that net revenue stays at tenth year level. At the end of the twelfth year, the site is due for redevelopment. The cost of building the squash court is estimated to be ram. To nance the court, the University must draw from its re- serves, currently earning 12% in Local Authority Bonds. Selling sufcient bonds would involve legal and administrative costs of 320. Advise the University on the viability of the project. What other factors should the University take into account? 10. A rm has an annual demand of 3 units for a good whose purchase cost is t per unit. Each order costs 4: to place, and the cost of holding stock is hill: of the average value of stock per annum. Determine the optimal order quantity. A local rm uses 202!) units of a particular component each year. The component has a purchase price of 4t'unit, while the cost of holding stock is estimated at 20% of the average stock value. If the cost of placing each order is 12.50, nd the optimal number of orders placed each year. Suppose the component supplier offers a discount of 2% on the purchase price if orders are placed in units of tin}. Is the discount worth accepting? Suppose that instead of a single gure you had been given a probability distribution for the number of units used each year. Indicate the effect on stock policy. Questions 1 and 2 have a combined weight of 60 minutes. 1. Evaluate and critically examine the pros and cons of the Uruguay Round of GATT. Limit your essay to the inclusion of the following topics as they relate to GATT: the issue of national sovereignty, special interest influences, the neoclassical free trade argument, the new 10 trade theory argument (see Mussa, Krugman, and Mcculloch), multilateral vs trade bloc and bilateral agreements, the loss of tariff revenue, welfare gains, the factor price equalization theorem, government procurement laws, real growth in GDP estimates attributable to GATT, compensation of the losers, and proposed definitions of dumping. You will lose points if these topics are not addressed. 2. Critically assess President Clinton's foreign trade policy agenda. Comment on his trade initiatives (since he became President). With reference to GATT, from your midterm to the present, comment on U.S. political momentum and maneuvering. Technical questions 3. Draw the offer curves for the U.S. and Japan. (2) Assume there are only two goods: cars and beef. The U.S. imports cars. Suppose the U.S. imposes a 10 percent tariff on cars. Assume the tariff revenue is redistributed in the form of beef. Show graphically (assume that Japan's offer curve is elastic in the relevant region of consideration) Place Cars on the horizontal axis. a. the effect on the volume of trade. What happens to imports? Exports? (3) b. the tariff revenue. (1) c. the tariff. (1) d. the effect on welfare. (1) e. the effect on the DTOT. (1) f. the effect on the WTOT. (1) g. how large would the tariff have to be to maximize the welfare of the U.S. (1) Suppose instead the tariff revenue was distributed in the form of cars. Show graphically h. the effect on the volume of trade. What happens to imports? Exports? (1) i. the tariff revenue.(1) j. the tariff. How does it compare to the previous case? (2) k. the effect on welfare. (1) 1. the effect on the DTOT. (1) m. the effect on the WTOT. (1) Assume that Japan's offer curve is inelastic (such that the Meltzer paradox occurs) in the relevant region of consideration and assume that the tariff revenue is redistributed in the form of beef. Show graphically n. the effect on the volume of trade. What happens to imports? Exports? (2) o. the tariff revenue. (1) p. the tariff. (1) q. the effect on welfare. (1) r. the effect on the DTOT. (1) s. the effect on the WTOT. (1) 4. Given that an import tariff is imposed, what does the Stopher-Samuelson theorem infer? (3) a. Explain intuitively why the theorem holds. (5) b. Does the theorem hold in the three cases discussed in question (3.)? (2) 5. Assume there are two goods: beef and cars (capital intensive) two countries: Japan (capital abundant) and the U.S.: and two inputs: labor and capital. a. State and then graphically demonstrate the H-O theorem. (5) b. According to the H-O theorem, what are the general equilibrium effects associated with free trade? Be sure to take into account the factor price equalization theorem. (6 c. Suppose that the growth of capital is positive and that of labor is zero in the U.S. According to the Rybczyski theorem, how is production affected (prove your statement via an Edgeworth Box), how is the TOT affected, and how is the level of welfare affected in the U.S.? (7) 6. What is the Leontief Paradox? Give one explanation to explain the paradox. (7) Final 1995, International Trade and Development Name_ (60 minutes for the essays) Choose 2 of the following essays. 1. Cite some recent examples of foreign direct investment. Is foreign direct investment beneficial to the host country? What problems (give examples-China, India, Nigeria, etc.-from artfolio) hay the WSJ articles) are associated with foreign direct investment? What influence does foreign - BOP statistic nd public a
