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just equal zero are respectively: (a) $10,00, $10.00 (b) $3.33, $9.75 (c) $10.50, $12.50 (d) $9.00, $10.50 (e) $9.00, $11.42.

137. A monopolist faces the follovving completely isolated markets:

Market A P $14 $13 $12 $11 $10 $9 $8 Q 1 2 3 4 5 6 7

Market P $16 $13 $10 $8 $6 $4 $2 Q 1 2 3 4 5 6 7

Average total cost is constant at $4 per unit. What is the firms profit? (a) $0 (b) $12 (c) $24 (d) $6 (e) $48.

138. You know youre paying external costs when: (a) the new roommate you found with a Nexus ad moves in wearing a hearing aid and carrying a large stack of Lawrence Welk records (b) the person sitdng next to you in the Econ 1 exam badly needs a shower (c) you catch a nasty glint in the eye of the who sells you a twenty cent stamp for a dollar (d) your neighbors dog walks off with a pordon of your heel between its jaws (e) answers (b) and (d) only.


Warm-up quesUons: A (e). (e). (a). D (d). E (c). F (b). G (a). H (d). 1 (e). J (e). ( ). L (d). General quesdons: 1 (c). Check with text if unsure. 2 (a). Part of the cost of employing such a person is the health risk to others. 3 (e). The tax would equate internal costs with social costs. By the analysis in Section V, some compeddve firms will need to go out of business. 4 (d). Atypical instance. 5 (d). Wilh no externalides, a subsidy would result in MSB < MSG. Efficiency is solely concerned with whether all benefits are captured by someone. 6 (c). See text. A monopolist would produce less than the in Fig. 1 but perhaps too much less. 7 (b). Theres no right of exclusion until the oil is brought from the ground; hence a race to produce it occurs even when its more valuable if left stored. 8 (d). By definidon. 9 (d). See Fig. III. Use triangle formula. 10 (b). Spinoffs are external benefits; posidve externalities. 11 (c). The patent system attempts to remove some of the problems inherent in #10. 12 (d). Again the marginal social benefits exceed my private benefits, because some of the benefits accrue to the neighbors. 13 (e). Wilh fifty million independent producers of defense, transacdon costs would probably make the provision of a navy, for example, impossible; fifty million rifles are likely to be less effecdve than the equivalent expenditure in aircraft carriers, modern jet-fighters, and other modern weapons. There will also be free-rider problems. 14 (c). Depends upon the size of the external costs and benefits, since the effects cut both ways. 15 (b). By defirution. 16 (c). The fact that its private suggests that no others are affected. If so, external costs are

zero. 17 (d). As polludon is removed, the costs of addidonal purification began to outweigh the benefits. 18 (a). Like #6. A monopoly will restrict output, which is desirable when there are external costs. Whether this will be too much or too litde, we cant say without more information regarding the size of the cutbacks and the external costs. 19 (c). The benefits apparently outweigh the costs. Otherwise a sufficiently large payment to build elsewhere would have been made. 20 (b). The benefits of design research reaped by GMs competitors will not be taken into account by GM in its decisions. Hence MSB > MPB = MSG. 21 (e). In no case are external parties affected by the transactions. 22 (a). First draw the picture. Optimal tax = marginal external cost = marginal social cost less marginal private cost. 23 (c). Establishing permissible pollution levels no matter what it costs to achieve them is inefficient; the right amount depends upon the costs and benefits. 24 (b). Usually the best available technolog) costs many times that of an almost as good technology, while only trivially improving the environmenL 25 (d). Though customers may value demonstrations more than the cost of providing them, the effect in (a) may make them hard to come by. Choice (b) is an extremely common type of free-riding in the drug industry, which undermines investment incentives. Holders of McDonalds franchises can enrich themselves by supplying burgers that dont meet the expectations of customers. Its in McDonalds interest to resist this and similar types of free-riding. That is why there is frequendy tension between franchise holders and the central company, populist explanations notwithstanding. 26. (e) See text. 27. (a) See answer to #26.


1 (c). By definition. 2 (e). The volume enclosed increases more rapidly than the cost of enclosing it, so economies of scale exist. 3 (e). A monopolist has no supply curve. To have a supply curve, the monopolist would have to respond to a given price. But theres no given price to respond to in monopoly. The monopolist picks the price. 4 (e). AR = P = MC is the competitive outcome. 5(d). Economies of scale. 6(e). Costs are likely different, so not presumably price discriminadon. 7 (e). A natural monopoly not monopolisdc compeddon is likely to result. 8 (d). Precisely the reverse of the assumptions of the model 9 (d). Interdependence suggests oligopoly, but it cant be a cartel in equilibrium. 10 (e). Since the price will be higher than without the cartel. 11 (c). Smoke is a negative externality for many. 12 (c). Almost by definition. 13(d). MRP slopes down because, with product price given, marginal physical product declines with increased employment. This is simply the law of diminishing marginal returns. 14 (c). Here profit maximization is the same as revenue maximization. MR = MC = 0. 15 (a). Follows firom revenue maximization. 16 (c). First draw the picture. Competithe output occurs where marginal private cost = $1 = price, i.e. 1500 cans. The efficient output occurs when the marginal social cost curve strikes the demand curve. 1*7 (d). Q increases 5 units for each 10 decrease in price. 18 (a). Price is $1. 19 (c). MC not affected. increases. 20 (b). One of the predictions of the model. 21 (e). Where MC = 0. 22 (d). Use uriangle formula; 1/2 x 6000 x $1 = $3000. 23 (a). Easier if you first draw the picture. This will correcdy internalize the external costs. 24 (c). The change in total factor cost of labor $1250 - $800. 25 (a). See question #3. 26 (d). As entry occurs products will be less differentiated from their closest competitor. The greater the degree of substitutability, the higher the elasticity. See Section IV. 27 (d). Having acquired them, acquisition cost is irrelevant. Maximizing total revenue may involve some dumping if demand is inelastic in some range, but this is unlikely in an agricultural market. 28 (c). The demand curve is downward sloping. 29 (d). Equating MR will maximize total revenue for a given output and this implies a higher price in the relatively inelastic market 30 (a). Then ATC/Aq = MC = 0. 31 (b). The competitive wage is the highest that can be paid before employment starts to fall. 32 (c). When the union raises the wage, workers will be replaced rapidly. Many jobs will be lost This will make labor

demand very elastic. 33 (d). The subsidy will alter, for no good economic reason, the relative cost of various pollution control devices. 34 (c). It will not pay to employ the worker for any overtime. 35 (e). Only true when product demand is perfectly elastic. 36 (c) Public good. 37 (d). With unlimited economies of scale a natural monopoly is likely. 38 (c). Social optimum occurs where supply and demand cross since no externalities. This will reduce optimal feed grain. 39 (b). Unless entry is blocked, this is the predictable long run result. 40 (c). Demand is straight line, no kink. 41 (e). By definition MR less than price. 42 (c). This prevents us drawing a well-defined demand curve. Depends upon reactions. 43 (a). Never sell in the inelastic region. 44 (c). Raises product price and so increases labor demand. 45 (b). Nice ifyou can get it 46 (a). Draw the rays. 47 (a). External benefits. 48 (d). Product differentiation. 49 (d). The effects work both ways. 50 (d). Would imply that the owner could do better elsewhere. 51 (a). Aii infinitely elastic supply curve implies that a firm is a price-taker in the labor market, which defines a competitive purchaser. 52 (a). If a firm were operating there, TR could be increased and TC reduced, by restricting output, thereby increasing profit 53 (b). Could cut totalj costs without cutting output. Hence could not bc jointly maximizing profit. 54 (c). The free-rider prob-l lem. 55 (b). For efficiency we want the TC of produol ing a given level of safety to be as small as possibIc. This implies that the legal burden should be on the part) who can meet it at the least cost. In recent; however, the courts have extended liabilit)- to the who have the greatest ability to pay, thereby many resources. 56 (e). Draw the rays to the TC« 57 (d). If so, is falling, the definition economies of scale. 58 (c). Marginal/Average Not only is MC constant, MC = AVC. 59 (c). TFC/q. If AFC = $6 at Vs q, dien at q, AFC must be because weve doubled the size of the denominatoi die AFC formula. AVC = - AFC, so at q. AVC = - 3 = $7. Clever, dont you think? 60 (b). If der are same, MR and P would be the same. 61 (d). MC $5 from average/marginal rules. MR - $5 when Q Tc= (P-ATC)Q-(11-5)3 = $18. 62(e). Competit output would be 5 where demand curve strikes curve. Loss of consumer surplus on the 4th book is Note you cant use the triangle formula on this o because the demand curve is discrete. 63 (b). Hitf tiansactions costs and massive free-riding preclude Coase Theorem. 64 (e). Its not maximizing p since MR = 0 and MC exceeds zero. But diere nia

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