Answer Key to Study Questions for the Final

Here is the answer key. Let me know if you think there are any errors.

1-A, 2-D, 3-B, 4-D, 5-B,
6-D, 7-C, 8-A, 9-C, 10-B,
11-D*, 12-C, 13-A, 14-A, 15-C, 16-C, 17-D, 18-C,
19-A, 20-C,
21-B, 22-B, 23-A, 24-C, 25-B,
26-B, 27-A, 28-D, 29-A, 30-B,
31-B, 32-B, 33-C, 34-B,
35-C, 36-B, 37-B

*oops. I didn't talk about deadweight loss. There will be no questions on deadweight loss. If deadweight loss is among the alternatives on a multiple choice problem it is not a correct answer so ignore it. There is also a statement about monopoly inefficiency on the review sheet that refers to deadweight loss. Ignore that.

So what is deadweight loss? Well, it is "lost opportunity for mutually advantageous gains". In the monopoly we argue that it produces fewer units of a good at a higher price, when compared to how the outcome would be under perfect competition. This higher price and lower quantity gives rise to this deadweight loss.

I hope you are not confused now.

For problems 27 and 28, try increasing output initially by 1500 to an industry output of 10,500, which would put the price at $50 (note, that demand curve is "linear" so its easy to figure that out). You'll see the cheater has the incentive to produce that amount and the other firm will have the incentive to retaliate and we wind up with a total output of 12,000 (6,000 each) at the unit price of $40.

Externalities and the "take home" problems

There are two problems (I think, I don't have the questions in front of me) that deal with externalities. We didn't talk about those in class.

First thing: I will accept any response as correct on those, so don't sweat it.

Second thing: You should give it a good guess.

Here's the lowdown on externalities:

Externalities are costs or benefits that are passed on to a "third party". There are usually two parties to a transaction: a buyer and a seller. But sometimes there are third party costs or benefits.

A negative external cost: something like pollution. I may not be buying the stuff that a polluter is selling, but I have to breathe the polluted air.

A positive external benefit: when society gains by having children educated or immunized so that they are productive and healthy citizens.

Sometimes when there are significant benefits, when left to the private sector not enough of the good will be provided. The case is made that the government can step in and help provide the good. (Which is what we observe with education.)

Similarly, with negative external costs, the government puts regulations on how business firms can operate (i.e., limit pollution emissions).

I hope this is helpful.

JJ