Question 1 Suppose that two vendors are located on a beach that is 100 metres long and that their consumers are evenly spread along this beach. According to Hotellings theory, if the vendors are not collaborative with each other, the most likely final physical location of the vendors will be:

a. Random.

b. Each of them will be located 25 metres away from each extreme, meaning that consumers will have to walk no more than 25 metres to buy ice-cream.

c. Both of them will end up right in the middle, meaning that consumers will have to walk up to 50 metres.

d. Any place as the location does not affect the demand that each vendor will be facing.

Question 2

According to the theory covered in class, an optimal two-part tariff pricing scheme includes:

a. A lump-sum entry fee that captures the surplus consumers would receive in its absence and under competitive conditions, and a price per unit equal to the marginal revenue.

b. A lump-sum entry fee that captures the surplus consumers would receive in its absence, and a price per unit equal to zero.

c. A lump-sum entry fee that captures the surplus consumers would receive in its absence and under competitive conditions, and a price per unit equal to the marginal cost.

d. A lump-sum entry fee that captures the deadweight loss that would emerge in its absence, and a price per unit equal to the marginal revenue.

Question 3

In an Edgeworth Box representing a classical pure exchange economy, a contract curve represents:

a. Pareto-efficient outcomes

b. Outcomes that can be improved according to Paretos definition of efficiency

c. All possible Pareto-improvements

d. All possible Pareto-improvements

Question 4

An externality can be defined as:

a. A cost not internalised by markets that affects consumers only

b. A cost not internalised by markets that affects consumers and/or producers

c. A benefit not internalised by markets that affects consumers only

d. A cost not internalised by markets that affects consumers and/or producers

e. A cost or benefit not internalised by markets that affects consumers and/or producers

Question 5

In the problem presented in last question, you can conclude that:

a. (i) If the price of the public good is divided by two, each citizen would have to pay more than his/her reservation price; (ii) the provision of the public good increases the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider provides advantages; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) if there is no private agreement, the government could force cooperation by introducing a tax to collect the money and use this money to finance the public good.

b. (i) If the price of the public good is divided by two, each citizen would have to pay less than his/her reservation price; (ii) the provision of the public good increases the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider provides advantages; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) a private agreement will most likely not occur; (vi) if there was no private agreement, there is no reason why the government should intervene; forcing individuals to do something that they chose not to do cannot increase their utility.

c. (i) If the price of the public good is divided by two, each citizen would have to pay less than his/her reservation price; (ii) the provision of the public good increases the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider provides advantages; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) a private agreement will most likely not occur; (vi) if there was no private agreement, there is no reason why the government should intervene; forcing individuals to do something that they chose not to do cannot increase their utility.

d. (i) If the price of the public good is divided by two, each citizen would have to pay less than his/her reservation price; (ii) the provision of the public good increases the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider does not provide any advantages; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) a private agreement will most likely not occur; (vi) if there was no private agreement, there is no reason why the government should intervene; forcing individuals to do something that they chose not to do cannot increase their utility.

e. (i) If the price of the public good is divided by two, each citizen would have to pay less than his/her reservation price; (ii) the provision of the public good increases the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider provides advantages; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) a private agreement will most likely not occur; (vi) if there is no private agreement, the government could force cooperation by introducing a tax to collect the money and use this money to finance the public good.

f. (i) If the price of the public good is divided by two, each citizen would have to pay more than his/her reservation price; (ii) the provision of the public good would decrease the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider provides has no clear advantages; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) a private agreement will most likely not occur; (vi) if there was no private agreement, there is no reason why the government should intervene.

g. (i) If the price of the public good is divided by two, citizen would have to pay more than his/her reservation price; (ii) the provision of the public good would decrease the level of utility of the citizens when each pays half of the cost; (iii) becoming a free-rider gives Citizen 1 clear advantages but there is incentive for Citizen 2 to free-ride; (iv) irrespective of what the other citizen decides to do, each citizen has an economic incentive to not pay; (v) a private agreement will most likely not occur; (vi) if there was no private agreement, there is no reason why the government should intervene.