1. proves that there is such a thing as a free lunch;

2. reduces market power;

3. may improve efficiency at the expense of equity;

4. may improve equity at the expense of efficiency;

5. None of the above.

D

49. Producing less then the market’s equilibrium quantity of diet sodas (a good with no external effects) means that:

1. resources must have had a higher valued alternative use producing something else;

2. consumer surplus will be higher then otherwise would be the case;

3. producer surplus will be higher then otherwise would be the case;

4. an additional unit of diet sodas would add more to society’s benefit that to it cost;

5. None of the above.

D

50. Free market allocation tends to be Pareto efficient unless:

1. market failure occurs;

2. externalities exist;

3. government sets prices to make them more fair;

4. a few firms dominate those markets;

5. all of the above.

E

51. Which of the following products would be least capable of producing an externality?

1. cigarettes;

2. stereo equipment;

3. vaccination against an epidemic disease;

4. education;

5. food.

E

52. A firm engaged in producing a certain good has private marginal costs which are greater then social marginal costs. Which of the following steps could the government take in increase economic welfare?

1. tax the firm;

2. subsidize the firm;

3. set a price ceiling for the good;

4. set a price floor for the good;

5. the government should not do anything.

B

53.If the last unit of output produced at a paper mill has a value to society of $10 and a social cost of $15, but the private cost to the company is $10, and the current price is $10, then the:

1. market is in equilibrium, but a lower output would make society better off;

2. market is in equilibrium, but a higher output would make society better off;

3. output and price are too low for equilibrium;

4. output is too low, and price is too high for equilibrium;

5. output is too high, and price is too low for equilibrium;

A

54. Imposing a tax on producers of which good is more preferable in terms of efficiency:

A) Demand for this good is elastic;

B) Demand for this good is inelastic;

C) There is a positive externality in production;

D) The equilibrium price of this good is very high.

E) The equilibrium price of this good is very low.

A

Free response:

The “Best Water Inc.” company is the sole water supplier of country Hochland. The management of the company insists that this monopoly position naturally stems from the fact that the LAC curve of this company slopes downward for all ranges of water demand and thus, no government intervention should be exercised in respect of the water supply industry.

(a) Is the management’s position grounded?

(b) All government’s experts insist that the water supply industry with a sole supplier is socially inefficient and thus, should be regulated. The “optimists” insist that due to price regulation the socially efficient outcome can be reached at no budget cost, while the “pessimists” consider this to be impossible and, hence, recommend applying price regulation in the way as to leave the “Best Water Inc.” company with just normal profits.

(i) Is the “optimists” position grounded?

(ii) Is the “pessimists” position grounded?

Use graphical illustrations in your answers

1. A part of the technology in producing widgets is dumping its waste into lakes and rivers. Draw a correctly labeled graph of the market for widgets.

2. Using your graph show the dead weight loss. Explain why there is a loss in efficiency.

3. What can government do to improve this situation? Draw a corresponding graph and give the explanations.

An industry is characterized by perfect competition. All firms in the industry are identical and initially the market is in the long-run equilibrium. Also assume the industry is rather small, and changes in its output do not affect the input prices.

a) Using appropriate graphs show:

i) Price and output of a typical firm

ii) Market price and output.

b) Suppose that due to changes in the consumers’ tastes the demand for a good falls. Using appropriate graphs show the effects in the short and the long run on:

i) Market price and output

ii) Output and profits of a typical firm

c) Suppose now that the market is again in the long run equilibrium and one company purchases all firms in the market becoming a multi-plant monopolist. Using appropriate graphs show:

i) The effects on the market output and price if the company can not shut down any of acquired firms (number of plants is fixed)

ii) The effects on the market price and output if the company can shut down acquired firms (number of plants is variable)

iii) In which of the cases (i) or (ii) the effect is bigger? Explain