# At its profit maximizing output bis lerner index of

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at its profit maximizing output, BI’s Lerner Index of market power = 50/51 if BI decides to produce a positive quantity, the price elasticity of demand at the optimal quantity must necessarily be, in absolute value terms, greater than unity 3

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4. A firm enjoying no cost advantages in a perfectly competitive industry has long run total costs = 100 + 10Q + Q 2 , and its demand curve is, P = 110: True False the firm’s profit maximizing output = 50 the firm’s sunk costs = \$100 EITHER ACCEPTED the industry must currently be in long run competitive equilibrium the firm’s producer’s surplus = \$2400 5. Recently a group of students rented a house next door to Professor Doright in Vancouver. These students (obviously not commerce students) are noisy, they do not recycle, and they never pay their rent on time. Prof Doright does not like noise of any kind. True False The students do not recycle because their marginal cost of recycling is lower than their marginal benefit of recycling. The students are creating external costs to Prof. Doright . Failure to pay rent creates a negative externality for Prof. Doright. The noise problem the students are causing Prof Doright could be avoided through negotiation if proper property rights were established and transaction costs were high. 6. The following statements can be made for a competitive firm in the long run. True False The firm maximizes profit where Marginal Revenue equals Marginal Cost if total cost is linear and increasing . 4
Revenue may be a decreasing function of quantity depending on the elasticity of demand facing the firm. The firm will supply the good as long as the price is above the fixed costs. In equilibrium the firm will have an economic profit equaling zero 7. Joe Rider has just purchased a new bicycle for \$1000 and must make a decision regarding insurance for his bike. Let w=wealth which includes Joe’s new bike. True False If Joe has a Utility function that can be represented by U=13w 0.9 then he will not want actuarially fair priced insurance. If insurance is fairly priced and the chance of theft is 50% Joe will buy insurance no matter what his Utility function looks like. If Joe has a risk premium of \$100 and the chance of theft is 50%, he will buy insurance as long as it does not cost more than \$500. EITHER ACCEPTED If Joe has a Utility function w U 76 . 1 = then he will always want to buy insurance with an actuarially fair price. 5

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8. Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost \$500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events: Scenario Probability Cost A. No one discovers flaw .15 \$0 B. Government fines firm .40 \$10 million (no lawsuits) C. Resulting lawsuits are lost .30 \$12 million (no government fine) D. Resulting lawsuits are won .15 \$2 million
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