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II. Short Answer There are 3 questions in this section, some with multiple parts. The points that each question is worth are in parentheses. Use

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II. Short Answer There are 3 questions in this section, some with multiple parts. The points that each question is worth are in parentheses. Use a few sentences to answer each question or draw a graph where appropriate. 1. (2 points) Why do subsidies create deadweight losses? Assume that nothing is external. You may find it helpful to draw a graph to aid in your answer, but it is not required. 2. (3 points) Sometimes in class, I will refer to GDP as "income," while other times I may call it "spending." If the mood strikes, I may even refer to GDP as "output." Why is it that I can use these terms interchangeably? (Hint: think about the circular flow of income.) 3. a. (2 points) In the context of a negative externality, what is "private marginal cost?" What is "social marginal cost?" 6 b. (2 points) In the context of a positive externality, what is "private marginal benefit?" What is "social marginal benefit?"

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