Econ 100A PS3 - Department of Economics University of...

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Econ 100A-Spring 2007 Page 1 Problem Set 3 D e p a r t m e n t o f E c o n o m i c s Spring 2007 University of California, Berkeley Prof. Woroch Economics 100A PROBLEM SET 3 Due: Thursday, March 15, 2007, 8:00 AM (in lecture) TRUE or FALSE or UNCERTAIN and EXPLAIN : For each statement below, decide whether it is true or false or cannot be determined given the information, and explain the reasoning behind your answer in a few sentences. When appropriate, provide a diagram. 1. Worried that too many people are smoking in California, Gov. Schwarzenegger is correct in his welfare economic analysis by favoring a law that imposes an ad valorem tax on cigarette sales, rejecting a corporate income tax on tobacco companies. 2. If a consumer has a quasi-linear demand function for only two goods in the world, movies and music, then income effects on movies will be zero. 3. If, in the short run, a firm has sunk costs, then these costs would not be deducted from revenue to find its producer surplus, and so its producer surplus is greater than economic profit. 4. As the quantity produced of a good increases, the social welfare generated by that good increases. MULTI-PART QUESTIONS : Answer all parts of the following 3 questions. 1. Suppose a competitive industry consists of identical firms with a constant long-run marginal cost of $10. In other words, MC = AC at every scale of production. And note that there are no fixed costs in the long-run. Suppose the demand curve at any price is given by D(p) = 1000 - p. a) What are the price and quantity consumed in the long-run equilibrium? b) Suppose one firm enters that is different from the existing firms. The new firm has a constant marginal cost of $9 and no fixed costs but can only produce 10 units (or fewer). What are the price and quantity consumed in long-run competitive equilibrium?
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Econ 100A PS3 - Department of Economics University of...

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