PAM_2000_Sp_2009_Problem_Set_1 - PAM 2000 Intermediate...

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PAM 2000, Intermediate Microeconomics Problem Set 1 Return to TA by beginning of class Thursday, January 29 th In class some examples were given of novel applications of marginal benefit/marginal cost analysis. These were examples of how something should or could be optimally allocated, but it was not allocation by a market. 1. Provide an example of your own of such non-market allocation, and discuss how marginal benefit/marginal costs analysis would apply to that example. 2. Draw a MB/MC diagram for your example, and explain in words why the MB and MC curves have the shapes they do. What does a point on the line mean? What is the interpretation of the area under the curves? Be sure to label both axes carefully. 3. Explain what the optimal quantity of the activity you identify is, and why that is the optimal quantity. Do you expect that the optimal quantity will be the actual quantity that we observe in the world? Why or why not?
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