Econ 100A Ans to PS4 - Department of Economics University...

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Econ 100A-Spring 2010 Page 1 Problem Set 4 Answers Department of Economics Spring 2010 University of California Prof. Woroch Economics 100A PROBLEM SET 4 ANSWER SHEET I. TRUE or FALSE and EXPLAIN : For each statement below, decide whether it is true or false, and explain the reasoning behind your answer in a few sentences. When appropriate, provide a diagram. 1. A price floor set above the market equilibrium price harms consumers and but benefits producers. Uncertain. Consumers are hurt because consumer surplus is lower at the higher price. Producers may or may not benefit depending on which quantity they succeed in selling. If producers can sell any quantity they desire at the higher price, they will supply Q sh and earn a larger producer surplus than before. At the higher price, however, consumers want to buy less than before. In this case, producers only produce and sell Q sl . They are getting a higher price, but selling less. Thus, the producer surplus may or may not have increased. 2. Partial equilibrium analysis will give biased predictions of the impact of a sales tax on a good when there is a close substitute for that good. True. The sales tax will increase the price of the taxed good. A partial equilibrium analysis would stop here. As there is a close substitute, the increase in the price will induce consumers to demand more of the substitute good, increasing its price. This increase in price will, in turn, feed back into the first market increasing demand there. The equilibrium price in that first market will be even higher now. And so on. When the new equilibrium is reached in both markets, prices are higher than would have been predicted by a partial equilibrium analysis. 3. If a firm has a cost function given by C(Q) = 100+Q 2 , then it is a natural monopoly. Uncertain. It will depend on the level of demand for the product. Assuming that we are examining a long-run cost function, MC(Q)=2Q and ATC(Q)=100/Q + 2Q. The marginal cost curve is upward sloping and the average total cost curve is u-shaped. Remember that a natural monopoly exists when one firm can produce the total quantity demanded at a lower cost than if several firms supplied the product. If total demand is such that a single firm may supply the entire market while still on the downward sloping portion of its ATC curve, then the firm is a natural monopoly (economies of scale). If total demand is such that a single firm supplies the entire market while on the upward-sloping portion of the ATC curve, then two smaller firms may be able to meet market demand with lower combined total costs (a single firm would experience diseconomies of scale). 4. Perfect price discrimination is impossible when all consumers have identical tastes and preferences.
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Econ 100A Ans to PS4 - Department of Economics University...

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