Microeconomics Answers

Saba and Hana own a small hotel. They run the risk of loss due to small kitchen fires. This risk can be mitigated by taking precautions (e.g., purchasing fire extinguishers, installing fire alarms). Assume that the total cost of precautions can be represented by TC= 80F + 4F2, where F is equal to the actions to reduce the risk of a fire. The total benefit of these precautions is TB = 100B – B2.

a) If Saba and Hana do not have any insurance for their restaurant, what is the optimal level of precautions? (Hint: Use MB and MC analysis to find your answer) (10 marks)

b) Suppose Saba and Hana already have insurance for their restaurant that reduces the total benefit of taking precautions to TB = 90B – 2B2. What happens to the optimal level of precautions? Show your work mathematically and explain your result analytically. (13 marks)

Education is a classic example of a signal on the job market. Is it because it has the

training that provides an increase in an individual’s value? Explain your answer in less

than 200 words.

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. (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)

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? (Max. 1000 words)

"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. (Max. 1000 words)

A.   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)

A.   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)

Consider a hypothetical economy described by the following equations:

C = 100 + 0.8Yd

I = 1200

G = 1000

X = 1110

M = 200 + 0.25Y

T = 250 + 0.3Y

Required:

i) Compute the equilibrium level of national income. (5marks)

ii) The level of consumption, income after tax and net exports that corresponds to the equilibrium level of national/income.

difference between short run and long run