Why do firms in monopolistic competition operate with excess capacity?
What will be an ideal response?
A firm's capacity output is the output at which average total cost is at its minimum. In monopolistic competition in the long run, MR = MC and P = ATC. At the long run equilibrium, it is the case that MC < ATC, which means that ATC is falling in this range and so production occurs at an output level that is less than capacity output.
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Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a positive externality.
What will be an ideal response?
Refer to Figure 5-11. S1 represents the supply curve that reflects the private cost of production and S2 represents the supply curve that reflects the social cost of production
One way to internalize the external cost generated by utilities is to impose a Pigovian tax on the production of electricity. What is the size of the Pigovian tax that will internalize the cost of the externality? A) P2-P0 B) P1-P0 C) P2-P1 D) P0
A subsidy
A. has the same impact on a market as a tax. B. has a larger impact on a market than a tax of the same amount. C. has a smaller impact on a market than a tax of the same amount. D. is the reverse of a tax.
As the baby boom ended, fewer families had young children and, as a consequence, the
a. demand curve for preschool services shifted outward b. demand curve for preschool services shifted inward c. supply curve for preschool services shifted outward d. supply curve for preschool services shifted inward e. supply and demand curves for preschool services remained constant