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
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