a) 1. False. Due to the inelastic demand curve, the entire burden of the excise tax
would fall on the producer as demand will be zero at any higher price
True. Because the quantity demanded by the customer is inelastic, she will
demand the same quantity no matter the price. Therefore the entire burden
of the excise tax would fall on the customer. Even though the tax is being put
onto the producer, the consumer shoulders all of the burden.
b) False. Due to the law of increasing opportunity costs, movement along the ppf
curve would decrease production of one good for another. These improvements in
tech would increase productivity by putting production at the maximum efficiency
point.
False. The increase in productivity in all productive areas will cause the PPF
to shift outwards and locate the world every time in a higher PPF.
c) False. If there are only 2 firms in the market, collusion can occur making it not
a perfectly competitive market. Therefore, if the firms both set firms higher in
cases such as airlines, they can make positive profits instead of zero economic
profit.
True. As long as there is free entry and exit, even if there are only originally 2
firms in the market, more will enter when there is positive economic profit
causing equilibrium price to shift back to zero economic profit in a
competitive market.
d) False, the market is monopolized when there is only one big firm creating
production rather than multiple firms. Elasticity of demand has nothing to do with
monopoly.
False. When the elasticity of demand is below 1 the market is not
monopolized as if it were monopolized, the firm would raise prices until the
elasticity was no longer less than 1.
e) True. When the market is perfectly competitive at equilibrium, the economic
profit must be zero as if a firm charged more than the min of the average cost,
they would have no customers because customers would buy the cheaper of the
homogenous goods.
False. In stage 1 equilibrium the cost will equal MC but not necessarily the
min of the AC because without free entry and exit it is possible to have prices
different from zero.
f) True. If a monopolist has to spend more to produce a good, they will pass on
the excess costs to the consumer as they have the ability to fix market price. rather (Price
makers than price takers)
False. MC is not effected by fixed costs as MC=MR at the same output and
price as before the increase in fixed price.
2. a) The reason for the firm not being on the PPF is that the best available
production methods are not being used
b) B
In a competitive market, P=AC, P=minAC, P=MC and P=MWTP
3. a) 24-6Q=2Q
24=8Q
Q=3
P=2Q=2(3)
P=6
b) CS=(24-6)(3)/2=27
c) DWL=((12-4)*1)/2=4
4. A sales tax of 25% of price would. The percentage tax causes the supply curve to
increase in slope (become steeper) therefore at equilibrium, the demand would be
much lower. Whereas if an excise tax of $1 were placed, there would be only a
little bit less demand.
5. A) The term is complementary goods. This means that the two are interrelated and
when demand for one product increases, the demand for the complementary good
also increases.
It means that the price increase of one good will decrease the quantity
demanded for the other. When you increase the price of clam chowder you
decrease the demand for sourdough bread.
b) refer to graph The storm will decrease the supply of clams decreasing the
supply of clam chowder. Therefore the equilibrium price will increase and
the equilibrium quantity transacted will decrease.
c) As they are complementary goods, when the supply of clam chowder is
decreased, the demand for sourdough bread will also decrease. Therefore, this will
negatively impact the market for sourdough bread and cause a downward shift on
the demand curve. Therefore both the price and equilibrium quantity will
decrease in the sourdough bread market.
6. A) The AC will increase and shift upwards. The MC will remain the same for
each individual firm. The MC has to go through the min of the AC so the AC
will shift up and right.
b) In stage II equilibrium, due to free entry and exit, the price will return to
equilibrium and the firms will end up selling the same quantity as they originally
did as firms will leave the market.
Asshowninthegraphbeloweachfirmwillincreasethe
amountproduced,producingatthenewminofAC.Firms
willexituntilpricerisestotheminofthenewAC.Theneach
remainingfirmwillproduceattheminofthenewAC,which
ishigheroutputthantheoriginalminofAC.Therewillbe
lessoutputintotal(byallfirms)butmoreoutputbyeach
remainingfirm