Suppose that in the market for paper, demand is p = 100 - Q. The private marginal cost is MCp = 10 + Q. Pollution generated during the production process creates external marginal harm equal to MCe = Q. Is social welfare greater under monopoly or under competition?
What will be an ideal response?
First, the socially optimal quantity of paper is found by setting MCp + MCe = p or
10 + Q + Q = 100 - Q. Rearranging yields Q = 30. The competitive equilibrium is found by setting MCp = p or 10 + Q = 100 - Q. Rearranging yields Q = 45. The deadweight loss of those additional units equals (45 - 30 ) ? (70-40)/2 = 225. Under monopoly, the firm sets
MCp = 100 – 2Q or Q = 30. The monopoly produces the socially optimal quantity, and therefore has no deadweight loss. Social welfare is greater under monopoly.
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A) discretionary fiscal policy; automatic stabilizers B) automatic stabilizers; monetary policy C) discretionary fiscal policy; conscious fiscal policy D) automatic stabilizers; discretionary fiscal policy
Refer to Figure 8.3. Holding other variables constant, if the economy is originally in equilibrium at the intersection of D1 and S1 and firms experience an increase in technology of production, the economy would move to the new equilibrium point
represented by A) w1 and L2. B) w3 and L2. C) w2 and L2. D) w2 and L3.
Once the supply curve for a product or service is drawn, it
a. remains stable over time. b. can shift either rightward or leftward. c. is possible to move along the curve, but the curve will not shift. d. tends to become steeper over time.
Because most people spend a very small fraction of the income on tap water, it is likely to be
A. inelastic. B. perfectly elastic. C. perfectly inelastic. D. elastic.