Action Items
• Write a two to three page paper, address the following:
• Describe in your own words the concept of market inefficiency.
• Provide an example of market inefficiency.
• Answer the following questions for your example in Part b:
▪ What are the sources of the market inefficiencies?
▪ What are the ways to deal with them?
• Answer the question below in your conclusion:
When does it make sense for government to interfere with a pure market outcome?
C11-3
1.1: A profit-maximizing firm picks the quantity of output at which________equals ________.
1.3: Arrows up or down: at a firm’s current level of output, marginal revenue exceeds the marginal cost. the firm should ______its output and______ its price.
1.10:Equilibrium? in your city, there are currently three firms providing oil changes for each firm, there is a fixed cost of $80 per day and a marginal cost of $12 per oil change. each firm currently maximizes its profit by providing 10 oil changes per day
a. for each firm, marginal revenue=$________
b. this is a monopolistically competitive equilibrium of ________ equals $______
2.5: Willingness to pay for Dunkin’Donuts Franchise you operate a Dunkin’Donuts shop under a franchise agreement. you pay a royalty of 6 percent of your sales revenue to the parent company. your profit-maximizing quantity is 10,000 donuts per year, and at this quantity your price is $1.00 and your average cost per donut(inclusing all the opportunity cost of production but not the 6 percent royalty)is $0.44 (related to application 2)
A) draw a graph with revenue and costs curves to show your profit-maximizing choice
B) what is the maximum amount you are willing to pay per year for the frachise
2.7:Lawn-cutting Equilibrium. Consider the market for cutting lawns. Each firm has a fixed daily cost of $18 for equipment and the marginal cost of cutting a lawn is $4 suppose each firm can cut up to three lawns per day. the market demand curve for lawn cuts is linear with a vertical intercept of $70 and a slope of -$1
a.if each firm in the market cuts three lawns, what is the average cost per lawn?
b.what is the equilibrium price under monopolistic competition?
c.how many lawns will be cut in total, and how many firms will be in the market?
3.1: the trade –off with entry is that an increase in the number of firms leads to higher ________ but greater_________.
4.1: advertising for eyeglasses ________ (increases/decreases) the price of eyeglasses because advertising promotes__________.
5.3: Arrows up or down: if we move from the cartel outcome to the duopoly outcome, the price _________ the quantity per firm _______ and the profit per firm_________.
6.8: under a price-leadership model, a sudden drop in price by the leader is unlikely to trigger a price war of other firmsbeliebe that the price cut was caused by higher__________.
12-3
1.1:there is asymmetric information in the used-car market because______(buyers/sellers) cannot distinguish between lemons and plums but ( buyers/sellers ) can
1.4: we will have a thin market used cars if the minimum supply price for plums(high quality) is _______ (greater than/less than) the willingness to pay for a lemon.
1.5arrows up or down: a decrease in the minimum supply price for a plum (high quality ) shifts the plum supply curve ________ and the likelihood of buying a plum__________.
2.4paying for information.you are willing to pay $7000 for a high quality car-a plum. The current price of used cars is $4000 , and 4 of 5 cars in the market are lemons, meaning that 1 in 5 is a plum.
a. suppose you could pay a finder’s fee to a personal shopper/mechanic who will find you a plum at a price of $4000 what is the maximum you are willing to pay as a finder’s fee?
b.as you shop for a used car you will bring each car you consider to your mechanic, who will thoroughly inspect the car if the price per inspection is $400, is it worth the money?
c. how would you answer to part (b) change if only 1 out of 10 used cars was a plum?
3.5: car insurance increases traffic_______because insured drivers ________(related to application 3)
5.1 the optimal level of pollution abatement is the level at which the ______ of abatement equals the_________ of abatement
6.2: the external cost of production is the cost incurred by _________.
7.8 options for abating noise pollution. Janis enjoys loud music and is willing to pay $9 for the first song and $1 less for each succeeding song($8 for the second , $7 for the third and so on) for her dormmates the external cost from the noise pollution is $4 per song (related to application 7)
a. suppose initially the price if sings is $0. how many songs will janisplay? illustrate with a graph
b.suppose the government imposes a pollution tax of $4 per song. how many songs will Janis play? compute the loss in consumer surplus from the tax, which increases the price of songs from $0 to $4.
c. Janis could soundproof her room, eliminating the noise pollution and her responsibility to pay the pollution tax if the soundproofing costs $30, is it worthwhile?
d. Janis could compensate her dormmates for each unit of noise pollution—each song played. how much compensation would be required? from her perspective, is paying compensation better than paying the tax, worse , or the same?
8.1 under a system of marketable pollution permits a firm with _______low/high) abatement will buy permits from a firm with ________low/high abatement cost.
13-3
1.1: the marginal revenue product of labor equals_________ times________.
1.2: a profit-maximizing firm will hire the number of workers where_______equals _________.
1.4: arrows up or down: the logic of the output effect is that a decrease in the wage will ________production costs, so the price of output will______ and the quantity of output demand will __________as a result the quantity of labor demand will ________.
2.1: arrows up or down: an increase in the wage_________the opportunity cost of leisure time, which tends to __________leisure time and ________labor time
3.8: in some countries it is customary to tip restaurant waiters we would expect the wages paid to waiters to be ______(higher/lower/the same)in countries where tips are customary.
3.10: the wage premium for beautiful people is about ________percent, while the wage penalty for unattractive people is about________percent(related to application 3)
4.1government transfer and tax policies increase the income share of the lowest quintile of the income distribution from about _______percent to about ________ percent
5.4: low-income person receiving cash aid under TANF receives a fixed sum per month for an unlimited length of time ________(true / false)
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