Case / Fair - Chapter 12 - 6-13-15-16-18-19

Chapter 12 - 6-13-15-16-18-19

This is a guidance answer ... your actual answer during the exam should be longer than this answer ...

6.     (a)    Disagree. The enjoyment of housing can be limited to those who pay for it. Therefore, the private market will supply it. However, housing, if it is attractive, may produce an externality in the nature of a public good.

        (b)    Disagree. Imperfect markets produce less product than they would if they were perfectly competitive and therefore charge a price greater than marginal cost.

        (c)    Agree. It is difficult for consumers to evaluate the skills of a doctor or to judge the advice a doctor gives them.

13.    (a)    Imperfect information—you don’t know enough about cars to recognize whether you need the repair.

        (b)    Public good—there is no way to limit enjoyment of the park to those who pay, so the market will not provide it.

        (c)    Negative externality—there is a by-product to this activity that affects (harms) parties outside the transaction of patronizing the bar to listen to the music.

        (d)    Imperfect competition—these firms are not acting like price-takers. Their decision to raise prices above marginal cost will restrict output (ticket sales) below the efficient level.

15.    Resources are allocated efficiently among firms in a perfectly competitive market because of the assumption of profit maximization. For firms to maximize profits, they must minimize the cost of producing their chosen levels of output, so firms must choose production technology that produces the desired output at the lowest cost. Maximizing profit also means hiring an input up until the marginal revenue product of the input is equal to its price. If all firms pay the same input prices, the marginal revenue product of the last unit of an input hired will be the same in all firms, so they are also allocated efficiently.

        Output is distributed efficiently among households in perfectly competitive markets because households will buy goods as their willingness to pay for goods is greater than or equal to their prices. As long as households are free to choose how to spend their incomes, they cannot end up with the wrong combinations of goods. Competitive markets ensure that households don't end up with the wrong goods and services.

16.    Society will benefit from more of a good being produced when the price of a good is greater than the marginal cost to produce that good. If the price of a good is less than the marginal cost to produce the good, society would benefit from less of the good being produced.

18.    Items b, c, e, and f are public goods because they bestow collective benefits on members of society and no one is excluded from enjoying their benefits.

Items a and d can be excluded from anyone who does not pay for their use, so they are not public goods.

19.    A positive externality is a benefit bestowed on an individual or a group who is outside, or external, to the transaction. A negative externality is a cost imposed on an individual or a group who is outside the transaction. Both positive and negative externalities can result in market failure because they can misallocate resources, causing waste or lost value.

Courtesy of Case/Fair/Oster, 11th edition, 2014

Case / Fair Chapter 7: 1-6

CHAPTER 7

1. Total revenue is $50,000 ($10 x 5,000). The opportunity cost of the capital is 10% of $100,000 annually or $10,000. Total cost, including opportunity costs, is $45,000 for labor plus $10,000 for capital or $55,000. Profit is TR – TC or $50,000 – $55,000 = –$5,000. The firm is suffering a $5,000 loss in economic terms.

2.   They are not earning economic profits; they are not considering opportunity costs. The opportunity cost of capital is 10 percent of $50,000 annually, or $5,000. Because simple revenue minus cost yields an accounting profit of only $2,000, adding $5,000 in opportunity cost means the firm is suffering losses of at least $3,000. In addition, it is not considering the opportunity cost of its own labor.

3.         The size of the theater is the fixed factor. Decisions include how to divide up the tickets, what price to charge, what shows to put on, and what kind of stage sets to use. All are constrained by the scale of the theater. In the long run, you might be able to raise money and build or acquire a bigger theater. There is no fixed factor in the long run; you can think big!

4.   (a)  The marginal product decreases as a single variable factor increases, holding all other factors constant.

      (b)  The table does exhibit diminishing returns because the marginal product of labor falls as labor increases:

L	TP	MP
0	0	—
1	5	5
2	9	4
3	12	3
4	14	2
5	15	1

5.   (a)  Total costs of each technique are as follows:

Tech A	$9	$12	$24	$30	$36
Tech B	$12	$19	$26	$33	$38

            Technique A is cheaper at all levels of output.

      (b)  Labor and capital employed would be as follows:

Q	L	K
1	5	2
2	10	1
3	14	5
4	18	6
5	20	8

      (c)

      (d)  With the price of labor rising to $3:

Tech A	$19	$32	$52	$66	$76
Tech B	$16	$25	$34	$43	$50

            Labor and capital employed would be as follows:

Q	L	K
1	2	5
2	3	8
3	4	11
4	5	14
5	6	16

           

6.   Clearly, the labor-intensive way would be to carry the boxes down the hall and up the stairs one at a time. She could get a friend or two to help. If the dorm has an elevator and she can borrow a hand truck, the job would be easy. She would be using capital to raise her productivity. To go three miles across campus, a car (capital) or a truck (more capital) would be nice, although she could carry the boxes one at a time across campus as well. In the developing world, where capital is scarce, people carry most of their stuff. To get the boxes to a new campus, she would probably mail them or ship them UPS. In this case, they would go in a big truck or an airplane (a great deal of capital).