HW2FALL11 - COST ­BENEFIT ANALYSIS HOMEWORK 2 FALL...

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Unformatted text preview: COST ­BENEFIT ANALYSIS HOMEWORK 2 FALL 2011 PART 1 For each of the following question, say if the statement is true or false. If you consider that the statement is true, argue why this is true (you can provide an example that illustrates this case); if you consider that it is false, provide a counter example. 1) If the quantity traded in a market that operates freely (without government intervention) is equal to the quantity that maximizes net benefit, then there are no externalities. 2) If WTP(Q) < PD(Q) and PMC(Q) = SMC(Q), then the quantity provided by a free market is strictly lower than the quantity that maximizes net benefits. 3) If a good is non ­rival in consumption, then PD(Q) ≠ WTP(Q). 4) A monopoly that does not price discriminate will always set a price where the demand is elastic. 5) Private firms do not provide public goods because they are not excludable. PART 2 Choose the correct answer in the following multiple ­choice questions. 1) Consider the following three statements: I) Efficiency is achieved at the quantity that maximizes net benefits. II) Marginal revenue is constant only when the firm is a price taker. III) Marginal revenue of providing a good that is not excludable is zero. a. Statement I is true while II and III are false. b. Statements I and II are true while III is false. c. Statements I and III are true while II is false. d. Statements I, II, and III are true. e. None of the options above is correct. 2) In this question, assume that the marginal utilities are strictly positive: I) The following consumer problem is an example of an externality: max x,y ≥ 0 {u( x, y )} s.t.: px x + py y + pz z ≤ w II) The following consumer problem is an example of an externality: max x,y ,z≥ 0 {u( x, y, z)} s.t.: px x + py y + pz z ≤ w III) T € €he following consumer problem is an example of an externality: max x,y ,z≥ 0 {u( x, y, z)} s.t.: px x + py y ≤ w € € € € € a. b. c. d. e. 3) Statement I is true while II and III are false. Statements I and II are true while III is false. Statements I and III are true while II is false. Statements I, II, and III are true. None of the options above is correct. Consider the following firm’s problem when evaluating the following three statements: max K ,L ≥ 0 { pF (K , L) − wL − rK } (Note that prices are given to this firm). I) Marginal revenue is equal to p . II) If the technology is Constant Returns to Scale, then marginal cost € is constant. III) If the technology is Constant Returns to Scale, then the marginal € cost of production equals the average cost of production. a. Statement I is true while II and III are false. b. Statements I and II are true while III is false. c. Statements I and III are true while II is false. d. Statements I, II, and III are true. e. None of the options above is correct. PART 3 Assume that the total cost that a firm faces at producing widgets is TC(Q) = MQ + F a) Does this cost function represent a case of Economies of Scale? Explain. b) Can a firm that has this production costs be a price taker? Explain. € c) Can this technology F ( N ) = A( N − F ) induce that cost function? If so, derive it. (you might want to assume that the firm is a price taker in the market of labor). € Let P D (Q) = A − BQ = WTP (Q) and assume that a single firm that employs the technology mentioned above supplies the market of widgets. d) What would be the price and quantity in this market if the firm cannot price discriminate? What is the Consumer Surplus in this case? e) What would be the price and quantity if the firm can do perfect price discrimination? What is the Consumer Surplus in this case? f) What is the efficient quantity of widgets in this society? Now, let P D (Q) = A − BQ < WTP (Q) = A + E − BQ. € g) h) i) Would your answer to parts d) and e) change if this was the case? Explain. What is the efficient quantity of widgets in this case? Find the size of the subsidy per unit sold that would induce this market to exchange the efficient quantity of widgets and do cost ­benefit analysis of this project. (You can assume that the cost of implementing the subsidy is zero). ...
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This note was uploaded on 01/24/2012 for the course ECON 4751H taught by Professor Triece during the Fall '11 term at Minnesota.

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