PS 3 Answers

PS 3 Answers - Microeconomics 100A Fall 2009 Econ 100A...

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Unformatted text preview: Microeconomics 100A, Fall 2009 Econ 100A - Problem Set 3 1 True/False/Explain 1. When MC is constant and there are fixed costs in production, we have economies of scale. Answer: True. A production function with constant MC and a fixed cost will demonstrate economies of scale because AC declines as q increases. Because MC is constant, AVC is also constant and equals MC. Since AFC decreases as q increases, AC (=AVC+AFC) declines as q increases. 2. The government wants to raise taxes in order to finance ongoing expenditure. However, unemployment problems are pressing and a main goal is to find an output tax which will not decrease output by too much. Due to your expert knowledge in firm behavior and market equilibrium, the government consults you to choose an industry tax which will have a small effect on industry output. You can choose between a tax in industries A and B. Firms in both industries face identical demand functions, but the production technologies are different. Both industries use only labor as input. In industry A, one worker can assemble one piece of output a day, whereas in industry B, workers are more productive when there are fewer of them. Your boss needs to go to a press conference later today to announce the government policy and asks you what to do. True or False: An excise tax in industry B will result in a smaller fall in output than an excise tax in industry A of the same magnitude. Answer: True. The PF in industry A has a constant marginal product of labor (MPL), so MC is constant, meaning the supply curve is flat. The PF of industry B has a dereasing MPL, so MC is increasing and the supply curve is upward sloping. A tax in industry A will result in a larger output loss. 3. Convenience stores near campus have high prices because they have to pay high rents for their locations....
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This note was uploaded on 02/12/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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PS 3 Answers - Microeconomics 100A Fall 2009 Econ 100A...

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