1. Critically Evaluate the Following Statements and Explain in What Way Or Ways They Are

1. 
Critically evaluate the following statements and explain in what way or ways they are true, false, or uncertain.

a.  If an entrepreneur's firm is earning zero accounting profit, then it should really consider getting out of the market.
[ANSWER] Yup, if accounting profit is zero, then economic profit is NEGATIVE and so the firm should seriously consider whether or not it is worth staying open in the short run and also whether or not it is worth staying in the market in the long run. Either it needs to expect price to go up, costs to go down, or both.

b.  If a perfectly competitive industry is an external constant cost industry, then the normal long run equilibrium price will never change.
[ANSWER] Nope… The long run equilibrium can change if factor prices and/or technology change due to exogenous events OTHER THAN a change in the number of firms in the market.

c.  All fixed costs are avoidable in the short run if you choose to shut down.
[ANSWER] Nope… some fixed costs are sunk and even if you shut down they are not recoverable or avoidable.

2.  You are given the following information about the perfectly competitive widget industry in New York State: all firms are identical; all firms have access to a technology with the production function x=L1/2 where L is measured in hours; all firms must get a permit to operate and the cost of the permit is $16; the current market wage rate is $1/hour; market demand is XD = 100 – P.
[ANSWER] See handwritten pages below

a.  Find and graph the lratc curve.

b.  What is the value for the long run equilibrium x*? P*? X*? N*?

c.  Find and graph the typical firm’s short run supply curve.

d.  Graph the side-by-side picture of the long run equilibrium in this market. Show where the following are in your graphs (P*, x*, X*, N* and profit*).

e.  What is the value of Net Social Surplus at the long run equilibrium and show it in the appropriate graph?

f.  What are the values of Consumers’ and Producers’ Surplus and show them in the appropriate graph?

g.  Now suppose that Governor Spitzer and the New York State legislature pass a bill requiring that price of the permit be INCREASED to $100. How do the long run market and firm equilibiria change? Graph your answers, too.

3.  Consider Abe and Betty and suppose uAbe= F1/2C1/2and uBetty= F1/2C1/2. Assume total food available is F=100 and total clothing available is C=100. Suppose initially at the endowment point that Betty has 25 units of food and 50 units of clothing.
[ANSWER] See handwritten pages below

a.  Is the initial endowment point Pareto Efficient?

b.  What allocations of food and clothing are on the "contract curve" in the Edgeworth Box for Abe and Betty?

c.  What allocations of food and clothing are on the "core" in the Edgeworth Box for Abe and Betty?

d.  Transcribe the allocations in your Edgeworth Box into a detailed utility possibilities frontier diagram.

e.  Suppose now that we agree that social welfare should be measured with the following function: Wsociety=min {utilityAbe , utilityBetty } What allocation on your utility possibilities frontier maximizes this social objective function?

FOR QUESTION 2:

FOR QUESTION 3.