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may not be some profit in this equihbrium. 65 (c). A hard shot to miss. 66 (d). By definition. 67 (c). If operating in inelastic region, profu is not at a maximum, so it cant be a joint profit maximizing cartel. Result is consistent with short run perfectly competidve equilibrium. 68 (b). Firms enter causing price to fall untd it equals minimum . 69 (e). AFC = TFC/q, so AFC decreases as q rises. AFC = - AVC so AFC must be less than whenever AVC does not equal zero. 70 (c). Welfare loss by definidon. The dollar value society places on having another unit, its marginal benefit (MB), exceeds die cost (.MC) of making it. 71 (d). AVC reaches a minimum first. 72 (e). You will not be able to cover . 73 ( ). P = in these two models. 74 (c). T\C = ($10;(400,000) = $4,000,000 so TFC =12-4 = 8 million, AFC at 200,000 is 8 million/200,000 = S40. 75 (a). MR = MC at 2, but AVC is not covered, so shut down. 76 (c). MR is negative after the kink. 77 (d). A consequence of monopsony. 78(a). Marginal/Average Rules. 79(c). Equals AFC which falls continuously. 80 (c). If AVC is constant at 500, then by the marginal/average rules, MC = 500 always. MC = MR = 500 at 4 burgers. 81 (a). By construction of the cur\es. 82 (e). All involve important effects on outsiders. 83 (d). P = to ehminate profit. Since is condnuously falling, MC is below at the chosen output. 84 (e). Less chance for arbitrage. 85 (d). See text 86 (d). In the long run a compeddve firm never operates when is falling, i.e., in the region of economies of scale. 87 (e). In compedtion P = MC. In monopoly AR = P, Avhich exceeds MR because the demand curve slopes dowii. 88 (b). If AVC exceeds P, it will pay a monopolist to cease operations in order to minimize losses. 89 (e). Definitions. 90 (a). Selling in the inelastic region is not profit maximizing. 91 (e). The manager vvill want to make TR as large as possible because he gets 10% of it. Consequently, he would cut the price where demand is elastic and raise the price where its inelastic. 92 (d). See text. 93 (e). All have downward sloping demand curves, the definition of market power. 94 (c). In the long run the monopolistic competitors demand curve is tangent to his . curve; hence profits are zero. 95 (e). Its in the book. 96 (a). MC meets MR below in the long run eqtiilibrium of a monopolistic competitor. 97 (a). Demand must be elasdc because MR is greater than zero. 98 (c). The more people drive ou the freeway during rush hour, the less space there is for others; hence the freeway is a private good provided by the government. Dont make the mistake of thinking that all public goods are

provided by the government or that the government provides only public goods. Some public goods are privately provided, for example, radio waves, and many private goods are provided by the government, for example, your education at UCSB. 99 (d). If you made the mistake of equating MRP with the wage rate, you are far from alone. Equate MRP with MFC to get the right answer. No matter how many times this sort of question shows up on the exams, most everybody seems to get it wrong. 100 (e). Exploitation is the dif ference between MRP and the wage rate; here it is $3. 101 (d). Efficiency looks to minimize the total cost of deterring the crime; putting someone in jail for two days costs society real resources in die form of jail expenses and possibly the loss of production while the person is in jail. The fine, on the other hand, costs society nothing; there is no lost output and no resources are deflected from other uses to build and run jails. True enough, it costs the person who pays the fine $500, but this is received by someone else, so it isjust a transfer within society rather than a cost to society. 102 (c). See text. 103 (c). If MR is greater than zero, TR will rise with the expansion of output. 104 (c). First thing to do is draw and label the graph. Then-recognize from the geometry of the demand and marginal revenue relationship that the quantity .sold is 4000. You can do the rest yourself 105 (a). The price increase means that both quantity sold and total cost are down. Since revenue is up, so is profit. What do you know about the elasticity of demand in the old situation? 106(b). Maximizing TR means selling at the point where, MR - 0, which is not profit maximizing unless MC = 0. Whether the monopolist makes a profit depends upon the position of his cost curves. 107 (d). Marginal/average rules. 108 (c). Since MC exceeds AVC, were on a rising portion of the .AVC curve. Therefore, price must be greater than minimum AVC and the firm should stay open and operate at a loss. 109 (c). Calculate TC and then take the dif ference. 110 (c). The rate at which the TVC curve is rising slows down because of gains from specialization. Ill (c). MC is the slope of the TC curve, so if TC is increasing at a decreasing rate, i.e., becoming flatter, dien the slope (MC) must be falling. 112 (e). Marginal benefit is the demand price, which under monopoly exceeds the MC of the last unit produced. 113 (c). Calculate the total factor cost of labor and then take the difference. 114 (d). An assumption of the kinked demand model. 115 (d). Entry occurs until profit falls lo zero. 116 (e). The social costs are the private costs plus the value of the oil lost to the existing

wells. 117 (d). Otherwise new firms would enter undl the profit disappeared. 118 (d). The price ceiling restricts the amount sold. As such, the firm will not use as many labor inputs. 119 (e). Classic case of insecure property rights. 120 (d). is $8, and AFC is S4, so AVC is S4. 121 (c). Everything will settle down to the minimum point along the average total cost curve. 122 (c). If variable costs are always zero, then the change in total cost, MC, is also zero. Therefore, the monopolist will operate where MR is zero, i.e., at the point of unit elasticity. 123(c). In this case the firm is minimizing losses. To do this one correcdy, you must be able to draw the cost curves correcdy. 124 (a). The externality is that he is slowing other drivers down. 12.5 (c). Social marginal cost will exceed private marginal cost when negadve externahdes such as pollution are involved. 126 (c). Entry assures that profit will be eaten away. 127 (c). Follows from the definition of average revenue. 128 (e). Labor demand will rise. But if labor supply curve is perfectly elastic, i.e., flat, the quantity of labor hired, but not the wage will rise. 129 (a). The increase in the price of foreign cars will cause people to shift into domestics, thereby raising their prices. This will increase the demand for domestic labor and therefore raise wages unless the supply curve of labor is perfecdy elastic. 130 (c). The supply restriction causes us to move along the demand curve for Japanese cars. Price rises and less cars are produced. The total cost falls, and, if demand is inelastic, total revenue rises. With rising total revenue and falling total cost, profit rises. Thus, an inelastic demand accounts for the seeming absence of Japanese objections to this policy. By the way, if the Japanese privately met to set these same import restric-

tions, they would be guilt\ of criminal and civil violations of the antitrust laws. Here we have an example of the government urging others to set up a cartel. 131 (b). Plug into the formida. 132(a). First thing to do is draw and label the graph. We add the external benefit of 520 per tree onto the private demand curve to get the fidl social benefit. If tree planting was optimal, more trees would be planted. The increase in gross benefit is the trapezoidal area under the demand curve, whereas the increase in cost is a rectangle. The triansnbr difference between them is the welfare loss that we want to calctilate. It has a height of $20 and a base of 2000 x 5. Therefore the area is S100,000. Dont you wish youd looked at questions before now? 133 (a). The curve of the contractors will shift upward by S5, which causes the perfecdy elastic industry supply curve to shift up by S5. Hence the price rises by exactly S5. 134 (c). First calcidate the MC for both firms, then sum horizontally to get the joint marginal cost. The joint .MC schedule is as follows: $4, 1; S5, 3; S6, 5; S7, 7; S8, 9; S9, 11. Now calculate MR and set MR equal to MC at 5 units, selling for $10. 135 (a). Did you set W equal to MRP again? Set MRP equal to MFC to get it right. 136 (e). Find minimum AVC and minimum 137 (e). Since these markets are isolated, the monopolist will price discriminate, which means he will produce where each markets MR = MC = $4, i.e., 6 units in Market A and 3 units in market B. Price will be S9 in Market A and $10 in Market B. 138 (e). External costs are paid by outside parties. While the may be evei bit as beasdy as the dog and your evenings of champagne music may be hellish enough, these costs are far from external to you. You are an insider to both transactions.

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