Micro Study Guide 2

What is the social optimum output in the graph?

Q2

How to calculate deadweight loss due to a tax

See graph

A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $90, its average revenue is $180, and its average total cost is $94. AT Q=500, the firm's profit is a. $43,000. b. $45,000. c. $47,000. d. $90,000

$43000 (180-94)*500 Profit = (P (Average revenue here $180) - TAC ($94))*500 (quantity)

Referring to figure 10-5, What is the (free market) equilibrium price?

$48

Suppose a firm in a competitive market has the cost curves on the chart, if market price is $10, what is the firm's total revenue?

$50 (5 units * $10) TR = Price*Quantity

Using the graph, the firm will earn zero profits if the market price is what?

$6 (where P = minimum ATC)

Using table 10-5, if the government wanted to eliminate exactly 10 units of pollution, which of the following fees per unit of pollution would achieve that goal? (A) $88 (B) $85 (C) $71 (D) $80

(B) $85

How do you internalize a negative externality?

Need to alter incentives so people take into account the external effects of their actions and shift market equilibrium to equal the social optimum. One example is to tax pollution and shift the Supply curve up.

What are examples of negative externalities?

air or water pollution, neighbor's barking dog or late night party, noise pollution from construction project, second-hand smoke, texting while driving

A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal revenue is $30, its average revenue is $60, and its average total cost is $34. The firm's maximum profit is a. $13,000. b. $15,000. c. $17,000. d. $30,000.

the firm's maximum profit is (60-34)*500 = $13,000

Using graph, if market price is $10, what is the firm's Total Cost?

$35 (5 units * ATC($7))

Referring to figure 10-5, what is the social optimum price?

$84

If government imposes a corrective tax that successfully moves the market from market equilibrium to social equilibrium, then the tax revenue for the government would be what using the chart?

(20-12)*500= $4000 (new price-old price)* quantity at new price

Using the table, what is the maximum profit the monopolist can earn? (A) $10 (B) $20 (C) $30 (D) $40

(B) $20 (P-ATC)*Q=Profit;(18-14)*5 = $20

Using the graph, a benevolent social planner would prefer: (A) a $48 price to any other price (B) 420 units to any other quantity (C) a subsidy of $60 per unit to a subsidy of $54 per unit (D) a tax of $54 per unit to a subsidy of $54 per unit

(B) 420 units of output to any other quantity (and a subsidy of $54/unit)

Using the graph, taking into account private value and external benefits, the maximum total surplus that can be achieved in this market is: (A) $8,640 (B) $8,820 (C) $26,460 (D) $4,860

(C) $26,460 (420*84*.5)+(420*(126-84)*.5) = private value and external benefits; doesn't subtract Deadweight loss

The world price of a ton of steel is $650. Before Russia allowed trade in steel, the price of a ton of steel was $1,000. Once Russia allowed trade in steel with other countries, Russia began: (A) exporting steel and the price in Russia decreased to $650 (B) exporting steel and the price in Russia remained at $1000 (C) importing steel and price in Russia decreased to $650 (D) Importing steel and the price in Russia remained at $1,000

(C) importing steel and price in Russia decreased to $650

The graph represents a market in which: (a) there is no externality (b) there is a positive externality (c) there is a negative externality (d) the answer can't be determined from the graph

(b) there is a positive externality (market equilibrium < social optimum)

Using Table 10-5 showing marginal cost for four firms (A-D) to eliminate units of pollution from their production processes, where if firm A eliminated one unit of pollution, it would cost $54 and eliminating a second unit would cost $67, if the government were to charge a fee of $79 per unit of pollution, how many units of pollution would the firms eliminate altogether? (A) 8 (B) 9 (C) 10 (D) 11

A = 8

Under same monopoly scenario (Q=500), marginal revenue $90, average revenue $180 and ATC of $94, what is the firm's total revenue? A $42000 B $45000 C $47000 D $90000

D $90000 ($180*500)

What is the market equilibrium price in the graph?

P0

Use the graph here. Assuming a firm operating in a competitive market has the following cost curve, firms would be encouraged to enter this market for all prices that exceed: (a) P1 (b) P2 (c) P3 (d) P4

P4 (Price = Marginal Cost = Average Total Cost)

Using the graph, If the market price is > P4 and less than P6, individual firms in a competitive industry will earn

Positive Profits

With negative externalities, social cost includes what?

Private cost (direct cost to sellers on supply curve) and external cost (value of the negative impact on bystanders)

Using the table which provides the price, quantity and average total cost for a MONOPOLY, at what price will the monopolist maximize his profit: (A) $6 (B) $12 (C) $18 (D) $24

Profit maximizing Q is where MR = MC (P-ATC)*Q = Profit (C) $18

What is a governmental solution to address a positive externality?

Subsidize good to shift the demand curve up by the amount of the external benefit. If external benefit were $10, subsidize buyers by $10.