EC1000 - Exercise 4 - Week 9 - Answers

EC1000 - Exercise 4 - Week 9 - Answers

1. A
2. C
3. A
4. B
5. B
6. C
7. B
8. D
9. B
10. D
11. A
12. D
13. B
14. D
15. D
16. C
17. A
18. D
19. A
20. B
21. F
22. F
23. T
24. T
25. F
26. T
27. T
28. F
29. T
30. T
31. Efficiency is not achieved because a public good is not excludable, and hence no price can be charged by the supplier, and it is non rival, so the willingness to pay of any single agent is lower that the social value of the good (which is the sum of the willingness to pay of all agents).
32. In the long run firms’ entry and exit will drive profit to zero, which means that price must be equal to average total cost. But all firms are profit maximizing, so they equate price to marginal cost at all times. This implies that marginal cost must be equal to average total cost. However, this necessarily implies that total average cost is minimized, so the firm operates at the efficient scale
33. Approximating the demand curve by a straight line, the deadweight loss (or excess burden) from taxation is equal to a half of the product of the unit tax and the decrease in quantity caused by the tax. (Draw a simple diagram to illustrate this.)The greater the elasticity of demand, the greater the decrease in quantity, and hence the greater the deadweight loss.

B.a. change in supply

b. change in supply

c. change in quantity supplied

d. change in supply

e. change in supply

32.

No Change in Supply / An Increase in Supply / A Decrease in Supply
No Change in Demand / p = q = / p ↓ q ↑ / p ↑ q ↓
An Increase in Demand / p ↑ q ↑ / p ? q ↑ / p ↑ q ?
A Decrease in Demand / p ↓ q ↓ / p ↓ q ? / p ? q ↓

33.In the short run equilibrium, the number of firms is fixed and so firms may earn positive profits or incur in losses. In the long run, the number of firms changes so that in the long run equilibrium price equals the average cost. Thus, firms operate at their efficient scale (since price = marginal cost = average cost, average cost must be minimum) and just break even.