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Practice_Problems_06 - low in the presence of external...

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Notes 06: Answers to Practice Problems 1. E) By the Coase theorem, Claude will end up playing for the team which values him the most regardless of who drafts him. 2. E) The initial allocation has no effect on the final allocation, since the efficient allocation will always result, but the initial allocation affects wealth. 3. A) The efficient outcome occurs where marginal social cost equals marginal social value. 4. E) The efficient outcome will not result in a market without government intervention when there are externalities and the Coase theorem does not apply. 5. B) People will get too few flu shots because they account only for marginal private value. 6. B) A subsidy will encourage greater consumption of oranges which will move the equilibrium toward the efficient outcome. 7. B) Efficient price and output occurs where MSC equals MSV. 8. C) The deadweight loss is to the left of the efficient point because consumptions is too
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Unformatted text preview: low in the presence of external benefits. 9. B) The current amount of sailing is too high because it does not account for the external costs. Raising the price of sailing will move the market toward the equilibrium. 10. B) Wayne would be traded to the team which valued him the most. 11. D) Wayne would prefer an auction because he would reap the benefit of his value, rather than the team which drafts him. 12. E) Ti ‐ Vo cuts down on the value of TV commercial time (because people don’t watch them as much) so TV networks will be less profitable and there will be less investment in TV shows. 13. E) Government intervention can improve market outcomes if there are externalities. Subsidies may not produce benefits for everyone in a market with externalities....
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