Economics 1 - Fall 1996 - Olney - Midterm 2

Economics 1 - Fall 1996 - Olney - Midterm 2 - ECON 1 F96...

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ECON 1 F96 Prof. M. Olney Second Midterm 1. Frozen yogurt and ice cream are substitute goods. In Berkeley, the market for these goods is characterized by monopolistic competition. Suppose Yogurt Park, a seller of frozen yogurt, earned abnormal profit in the 1980s. As a result, in 1991 Ben & Jerry's opened an ice cream store nearby. What effect would this have on Yogurt Park's profit? Why? Illustrate your answer with a graph. 2. Smoking creates negative externalities in the form of second-hand smoke, an apparent cancer-causing agent. A restaurant wants to serve both smoking and non-smoking patrons, but is willing to charge them different prices for the same meal. Use the graph at right to illustrate the optimal price the restaurant should charge a smoker for her/his meal. What should happen to the number of smoking patrons at the restaurant? Explain. 3. For your answer, you should draw on the articles by David Cutler & Lawrence Katz ("Untouched by the
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