EC201

Take-home Test 2

All answers except formulas or graphs should be typed. Either re-type the questions or download this document from my web page so that you include the questions before each of your answers.  This test is a demonstration of your work. Obtaining help, comparing answers … from anyone in or outside this class is considered cheating.

Essay 1

25 points

Use the article “...And Cigarette Revenues Up in Smoke” to help support your answers to the following questions.

1. Why do we tax cigarettes?

2. Use a graph(s) to demonstrate who bares the incidence (the largest burden) of a cigarette tax? Explain your graph(s).

3. If the government was concerned about mazimizing the amount of tax revenue it could obtain would cigarettes be a good item to tax? Explain how your answer depends upon the length of the time period under consideration.

Essay 2
25 points


1. What is the relationship between the price elasticity of demand and the firm’s total revenue?

2. The price of a good just fell from $5 to $4 and the quantity demanded increased from 10 units to 100 units.
a. Graph this situation.
b. Shade (using dots) the area representing the total revenue when the price is $5.
c. Shade (using small x’s) the area representing the total revenue when the price is $4.
d. What happened to the dollar value of total revenue?
e. What is the coefficeint of the elasticity of demand?
f. Is the demand curve between these prices elastic or inelatic? Why?

Essay 3

25 points


1. Say that you would like to buy a car in 5 years. You have $5,000 in the bank today and you can save an additional $2,000 each of the next five years. How 
much will you have to spend on a car if the interest rate is 15% and interest compounds annually?

2. You are interested in buying a house in two years but you are afraid the $7,000 you have in savings will not be enough for the downpayment. You have 
recently found out that your great great great grandfather just died and left you some inheritance. Unfortionately the will stipulated that you would receive 
$1,000 each year for four years beginning three years from today. Your favorite brother has agreed to give you the present value of your inheritance today if 
you allow him to collect it starting in three years. Will you have enough for the downpayment on the home if you need $10,000 and the interest rate is 10%? 
Show your work.


Essay 4
25 points


1. What is an example of a good that provides a positive externality? Explain why this good is a positive externality.

2. Are positive externalities a problem for society? Why?

3. Is public high school education a private or a public good? Why?