Microeconomics Answers

Question 5. (10 Marks) (Max. 1000 words)

a) Explain why cigarette smoking is often described as a good with negative externalities. (3m)

b) Why might a tax on cigarettes induce the market for cigarettes to perform more efficiently? (3m)

c) How would you evaluate a proposal to ban cigarette smoking? Would a ban on smoking necessarily be economically efficient? (4m)

Question 1.

Consider a monopolized industry. Is the deadweight loss from this industry greater if (1) the government sets price equal to average total cost or (2) the government sets price equal to marginal cost? Why? Use examples of monopoly form your own country to answer this question.

Question 3.

"What is the point of entering a perfectly competitive industry if it is simply to earn zero profits anyway?" Discuss this statement with reference to the long and short run, as well as to heterogeneity across firms.

Question 4.

Why is it the case in a long-run monopolistically competitive equilibrium that the firm’s demand curve is tangent to its average cost curve? Why could it not be a long-run equilibrium if the demand curve “cut through” the average cost curve

(10 marks)

1.  Why are price ceilings said to be inefficient? Can the government restore efficiency by imposing a production quota along with the price ceiling? Who benefits and who loses from such a program? ( Max.500 words)

1. Why are price floors said to be inefficient? Can the government restore efficiency by imposing a production quota along with the price floor? Who benefits and who loses from such a program? ( Max.500 words)

When differentiating the law of demand and law of supply , besides explaining the price increase and Qd decrease and vice versa, can I include substitute effect and law of diminishing for the law of demand in my explanation? does it consider a difference?

Suppose Germany and France each produce only two goods, guns and butter. Both are produced using labor alone. Assuming both countries are at full employment, you are given the following information: Germany: 10 units of labor required to produce 1 gun 5 units of labor required to produce 1 pound of butter Total labor force: 1,000,000 units France: 15 units of labor required to produce 1 gun 10 units of labor required to produce 1 pound of butter Total labor force: 750,000 units . a) if transportation cost are ignored and trade is allowed, will france and germany engage in trade? explainb) if a trade agreement were negotiated, at what rate number of guns per unit of butter would they agree to exchange.

Suppose Germany and France each produce only two goods, guns and butter. Both are produced using labor alone. Assuming both countries are at full employment, you are given the following information: Germany: 10 units of labor required to produce 1 gun 5 units of labor required to produce 1 pound of butter Total labor force: 1,000,000 units France: 15 units of labor required to produce 1 gun 10 units of labor required to produce 1 pound of butter Total labor force: 750,000 units a. Draw the production possibility frontiers for each country in the absence of trade.

How will the global hand sanitizer market get affected in the short- and long-term by the COVID-19 pandemic?

13. For a firm in a perfectly competitive market, the price of the good is always

a. equal to marginal revenue.

b. equal to total revenue.

c. greater than average revenue.

d. All of the above are correct.

14. If a firm in a perfectly competitive market triples the number of units of output sold, then total revenue

will

a. more than triple.

b. less than triple.

c. exactly triple.

d. All of the above are potentially true.

15. Because the goods offered for sale in a competitive market are largely the same,

a. there will be few sellers in the market.

b. there will be few buyers in the market.

c. buyers will have market power.

d. sellers will have little reason to charge less than the going market price.

16. Which of the following is NOT a characteristic of a monopoly market?

a. Firms are price takers.

b. Firms have difficulty entering the market.

c. There are many buyers in the market.

d. Goods offered for sale are not the same.

The government decides to protect supplies and introduce a unit subsidy for the good or commodity produced by that supplier.

1. Using a diagram, carefully explain the consequences of the action on the equilibrium price and quantity in the market for this goods.

2. Discuss the pro and cons of such policy

 Using illustrations provide an explanation on how the market adjusts to the market equilibrium when the price in the market is not originally set at the market equilibrium price.