B your decisions about how many cds to produce carry

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b. Your decisions about how many CDs to produce carry over to other decisions. You have to make the right number of CD players for people to use. If you make too many CDs and not enough cassette tapes, people with cassette players will be stuck with CDs they can't play. The probability of making mistakes is very high. You will also be faced with tough choices about the music industry compared to other parts of the economy. If you produce more sports equipment, you'll have fewer resources for making CDs. So all decisions about the economy influence your decisions about CD production. 11. a. Efficiency: The market failure comes from the monopoly by the cable TV firm. b. Equity 4
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c. Efficiency: An externality arises because secondhand smoke harms nonsmokers. d. Efficiency: The market failure occurs because of Standard Oil's monopoly power. e. Equity f. Efficiency: There is an externality because of accidents caused by drunk drivers. 12. a. If everyone were guaranteed the best health care possible, much more of our nation's output would be devoted to medical care than is now the case. Would that be efficient? If you think that currently doctors form a monopoly and restrict health care to keep their incomes high, you might think efficiency would increase by providing more health care. But more likely, if the government mandated increased spending on health care, the economy would be less efficient because it would give people more health care than they would choose to pay for. From the point of view of equity, if poor people are less likely to have adequate health care, providing more health care would represent an improvement. Each person would have a more even slice of the economic pie, though the pie would consist of more health care and less of other goods. b. When workers are laid off, equity considerations argue for the unemployment benefts system to provide them with some income until they can fnd new jobs. After all, no one plans to be laid off, so unemployment benefts are a form of insurance. But there’s an efciency problem why work if you can get income for doing nothing? The economy isn’t operating efciently if people remain unemployed for a long time, and unemployment benefts encourage unemployment. Thus, there’s a tradeoff between equity and efciency. The more generous are unemployment benefts, the less income is lost by an unemployed person, but the more that person is encouraged to remain unemployed. So greater equity reduces efciency. 13. Since average income in the United States has roughly doubled every 35 years, we are likely to have a better standard of living than our parents, and a much better standard of living than our grandparents. This is mainly the result of increased productivity, so that an hour of work produces more goods and services than it used to. Thus incomes have continuously risen over time, as has the standard of living.
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