Suppose that there are two firms, each generating three tons of SO2. Suppose also that the government has set a target abatement level of two tons. Under a policy of uniform abatement with permits, the firm with the lower marginal abatement cost:
A. will abate exactly the same amount of SO2 as the firm with the higher marginal abatement cost.
B. will abate less SO2 than the firm with the higher marginal abatement cost.
C. will abate more SO2 than the firm with the higher marginal abatement cost.
D. will sell its pollution permit to the firm with the higher marginal abatement cost.
Answer: A
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Because a competitive firm is a price taker, it faces a demand curve that is:
a. perfectly inelastic. b. relatively inelastic. c. relatively elastic. d. perfectly elastic.
Why is prediction in social sciences like economics more difficult than in physical sciences?
New classical economists say that an unanticipated decrease in aggregate demand first:
A. decreases the price level and real output, and then decreases long-run aggregate supply. B. decreases long-run aggregate supply, and then decreases the price level and real output. C. reduces short-run aggregate supply, and then reduces long-run aggregate supply. D. decreases the price level and real output, and then increases short-run aggregate supply such that the economy returns to the full-employment level of output.
Monopolistically competitive firms
A) have market power because they can set price above marginal cost. B) have no market power because they earn zero economic profit. C) have no market power because of free entry. D) have no market power because price equals marginal cost.