San Francisco State University ECON 560 Summer Problem set 6

Transcription

1 San Francisco State University Michael Bar ECON 560 Summer 2018 Due Wednesday, August 8 Problem set 6 Name Assignment Rules 1. Homework assignments must be typed. For instructions on how to type equations and math objects please see the notes Typing Math in MS Word. 2. Homework assignments must be prepared within this template. Save this file on your computer and type your answers following each section. 3. Do not delete the questions. 4. Late homework assignments will not be accepted under any circumstances 5. All the graphs should be fully labeled, i.e. with a title, labeled axis and labeled curves. 6. For instructions on how to plot data with Excel, see the notes Instructions for Excel. 7. In all the questions that involve calculations, you are required to show all your work. That is, you need to write the steps that you made in order to get to the solution. 8. This page must be part of the submitted homework. 1

2 Government 1. (10 points). Explain why the example of North and South Korea was used to illustrate the importance of regime for economic growth (as opposed to say comparing Cuba and U.S.). The starting point for both countries was in 1953, when both were devastated after the war, had similar natural resources and similar levels of education. So the main difference between the two countries was the regime. By the year 2000 South Korea had GDP/cap 16 times higher than that of North Korea. 2. (10 points). List 3 types of market failure in which government intervention might be justified. The 3 types mentioned in the text are: (1) public goods, (2) externalities, and (3) monopolies. There are other types of market failure, for example asymmetric information. Remark: Notice that when market failure exists this does not mean that the government must intervene, but rather government intervention might be justified. Also, it is important to realize that there are many kinds of government intervention and we need to study economics in order to understand the consequences of each type of intervention. 3. (10 points). Why do some economists oppose government intervention in markets, even when there is evidence of market failure? When government intervenes in the market activity, the original market failure is often replaced by government failure, which in many cases much worse than the original problem. Example. Suppose that there are externalities present in a market and economic theory says that corrective taxation can resolve the problem. Often times when a government agency is established to monitor the industry, calculate the necessary taxation and collect the taxes, the waste of the government agency itself exceeds the cost of the negative externality. Moreover, the calculations might be incorrect, or biased in favor of those companies that made contributions to election campaign. 4. (10 points). List 3 reasons why governments sometimes do things that are bad for growth. Three reasons: i. Governments have goals other than promoting growth (strong military, income equality). ii. Kleptocracy (rule by thieves). The government officials have incentives to do things that would increase their own wealth. iii. Self preservation. New ideas and new technologies are often perceived as a threat to the existing regime. 5. (10 points). Give an example of a dictator who promoted growth and innovation. Emperor Meiji ( ), turned Japan into a world power during his 45 years of ruling. 2

3 Geography, Climate and Natural Resources 6. (10 points). Based on the following diagram, proximity to sea is positively correlated with standard of living. True/false, circle the correct answer and provide a brief explanation. The above graph shows that the standard of living is higher in geographical areas where greater fraction of population has access to sea. 7. (10 points). List 3 adverse effects that the tropical climate has on GDP/capita. i. Land is less fertile (erratic rain and no frost) ii. Diseases (e.g. Malaria) iii. Heat lowers human effort 8. (10 points). The following graph shows the relationship between Natural Capital and GDP/capita growth (Y). Based on the graph; natural resources are very important for growth. True/false, circle the correct answer and provide a brief explanation. 3

4 The graph shows very weak correlation between natural resources and growth. Moreover, this sample of countries omits some countries that had very bad growth experience despite plethora of natural resources. If those countries were included, the correlation would be even smaller. Natural Resources and Environment 9. (10 points). Basic concept in natural resources. a. Give an example of a non-renewable natural resource. Oil, gold, coal. b. Give an example of a renewable natural resource. Fish, animals, trees, atmosphere. 10. (15 points). Suppose that in 2016, the world had a stock of proven oil reserves of 1707 billion barrels, the annual usage 35 billion barrels, and we forecast that the usage will grow at annual rate of 1.2%. a. How many years will the oil reserves last under the given scenario? When gg 0, we use the formula: TT = ln 1 + gg SS UU ln = 35 1 = yyyyyyyyyy ln(1 + gg) ln( ) b. Suppose that due to technological progress and alternative energy sources, the growth rate of usage is zero. How many years will the oil reserves last under this (optimistic) scenario? We use the formula, with gg = 0: TT SS 0 = UU 0 (1 + gg) tt = UU 0 tt=0 TT tt=0 SS 0 = (TT + 1)UU 0 TT = SS 0 1 = yyyyyyyyyy UU 0 35 c. Suppose that technological progress and alternative energy allow us to decrease usage at 1.2% every year. How many years will the oil reserves last under this (extremely optimistic) scenario? When gg 0, we use the formula: ln 1 + gg SS UU ln TT = 0 1 = 35 1 = 71.9 yyyyyyyyyy ln(1 + gg) ln( ) 4

5 11. (15 points). There are 10 people in a village. Each person can work in the local lake or in the city. The wage in the city is $54. The revenue R, the average revenue AR and the marginal revenue MR as a function of number of fishermen L is given in the next table. Assume that all the fishermen have the same skill, so that everybody will catch the same amount of fish. L R AR MR a. If the lake is a common property, find the allocation of workers and the total income of the villagers. Briefly explain how you got the answer. If the lake is common, then workers would like to work in the lake as long as AR 54 (the city wage). Thus, all 10 of the workers will work as fishermen in the lake ( AR ( 10) 54). Total income of the villagers is $550. b. If the lake is privately owned by one of the villagers, find the allocation of workers and the total income of the villagers. Briefly explain how you got the answer. The owner of the lake will allow fishermen to enter the lake as long as MR 54 (because the competitive wage that she has to pay them is 54 and she won t hire workers if their marginal revenue is less than the wage she pays them). Thus, 5 workers will be employed as fishermen at the lake ( MR ( 5) 54, MR(6) < 54 ), and their revenue is 400. The remaining 5 villagers will work in the city and earn 5 54 = 270. Total revenue is = 670. c. Find the size of a fishing permit that would result in optimal allocation of workers between fishermen and city workers. Briefly explain how you got the answer. 80 T 54 T T < 54 T > < T 26 5