Tutorial - Study questions - Chapter 4 PDF

Preview

Summary

practice question...

Description

Microeconomics

Study Questions

Chapter 4

4-RQ2 Assume that candle wax is traded in a perfectly competitive market in which the demand curve captures buyers’ full willingness to pay while the supply curve reflects all production costs. For each of the following situations, indicate whether the total output should be increased, decreased, or kept the same in order to achieve allocative and productive efficiency. a. The maximum willingness to pay exceeds minimum acceptable price. Increase production b. Marginal Cost > Marginal Benefit. Decrease production c. Total surplus is at a maximum. Stay the same d. The current quantity produced exceeds the market equilibrium quantity. Decrease production 4-RQ6 Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality. a. Overallocation of resources. Negative b. Tammy installs a very nice front garden, raising the property values of all the other houses on her block. Positive c. Market demand curves are too far to the left (too low). Positive d. Underallocation of resources. positive e. Water pollution from a factory forces neighbors to buy water purifiers Negative 4-P5

On the basis of the three individual demand schedules below, and assuming these three people are the only ones in the society, determine (a) the market demand schedule on the assumption that the good is a private good and (b) the collective demand schedule on the assumption that the good is a public good.

Societies willingness to pay is a vertical summation: D1- 1 =$5 D2- 1 =$8 D3- 1 =$6 therefore the willingness to pay is 19

4-P6

Market Demand 1 2 4 7 10 13 16 19

Use your demand schedule for a public good, determined in Problem 5, and the following supply schedule to ascertain the optimal quantity of this public good.

Optimal quantity: society willingness to pay = price producers willing to sell

McConnell-15ce

Page 1

Microeconomics 4-P7

Study Questions

Chapter 4

Look at Tables 4.1 and 4.2, which show, respectively, the willingness to pay and willingness to accept of buyers and seller of bags of oranges. For the following questions, assume that the equilibrium price and quantity will depend on the indicated changes in supply and demand. Assume that the only market participants are those listed by name in the two tables.

When equilibrium price is $8 the the equilibrium quantity is 6 (there are six buyers and sellers a. What are the equilibrium price and quantity for the data displayed in the two tables?

b. What if instead of bags of oranges, the data in the two tables dealt with a public good like fireworks displays. If all the buyers free ride, what will be the quantity supplied by private sellers? c. Assume that we are back to talking about bags of oranges (a private good), but that the government has decided that tossed orange peels impose a negative externality on the public that must be rectified by imposing a $2-per-bag tax on sellers. What is the new equilibrium price and quantity? If the new equilibrium quantity is the optimal quantity, by how many bags were oranges being overproduced before? /var/folders/69/3pcsdqs55p5g2hfsfj2nzwgm0000gn/T/TemporaryItems/(A Document Being Saved By screencaptureui 76)/Screen Shot 2020-06-30 at 3.41.21 PM.png

McConnell-15ce

Page 2

zero...