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2009 Micro Solution 3 PDF

This document outlines the solution key for an honors exam in economics. It provides guidance for grading student responses in 4 questions worth 15 points each. For the first question, students should mathematically model individual utility maximization and solve for returns being equal or unequal. The second question involves writing society's maximization problem to show the market solution may not be socially optimal due to externalities. The third question models an externality with a subsidy to demonstrate the optimum can be achieved with other solutions like a tax. The fourth question models housing producers and compares the competitive case of building until price equals costs versus an alternative case.

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21 views

2009 Micro Solution 3 PDF

This document outlines the solution key for an honors exam in economics. It provides guidance for grading student responses in 4 questions worth 15 points each. For the first question, students should mathematically model individual utility maximization and solve for returns being equal or unequal. The second question involves writing society's maximization problem to show the market solution may not be socially optimal due to externalities. The third question models an externality with a subsidy to demonstrate the optimum can be achieved with other solutions like a tax. The fourth question models housing producers and compares the competitive case of building until price equals costs versus an alternative case.

Uploaded by

ADITYA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1011A HONORS EXAM SOLUTION KEY

JONATHAN HALL, FOR ED GLAESER

1. 15 points
There are many ways in which the student might correctly interpret this question. Therefore, the grader must consider each test on its own. Points are rewarded for mathematical
modeling, not for textual intuition.
5 points for a sensible, mathematical formalization of individual maximization that
will help us understand the model in the question. Housing may or may not enter
individual utility, and the returns on investments may or may not be stochastic.
5 points for solving the individuals maximization problem such that the model can
deliver an answer to the question about returns being equal or unequal.
5 points for closing the model for the whole economy in some way.
2. 15 points
5 points for writing down societys maximization problem in a coherent way that
captures the externality.
8-10 points for showing, mathematically, that the socially optimal solution may not
equal the market optimum.
up to 2 points may be awarded for a reasonable discussion of externalities and the
Coase Theorem.
3. 15 points
5 points for writing down the appropriate maximization problem with a subsidy
and externality.
5 points for demonstrating mathematically that the optimum can be achieved.
5 points for demonstrating that there are other solutions - the most obvious is a
tax on the non-housing investment opportunity.
4. 15 points
5 points for modeling housing producers in some way. If the student has already
done this in previous sections (which is very unlikely), some points can be allocated
from that.
5 points for solving the model when competitive developers build houses until price
falls to cost of construction.
5 points for demonstrating an economic difference between the two cases.
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