Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to consumers. Such a policy would enhance the health of the citizenry, they argue. Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve, determine the resulting output and social welfare from such a policy. Compare this result to the competitive equilibrium
What will be an ideal response?
Consumer surplus is maximized when price equals zero. Output will be the quantity where the demand curve hits the quantity axis. The social welfare is less than the competitive result because for quantities beyond the competitive equilibrium, producers incur a cost for which they are not reimbursed. Some of this loss represents a transfer to consumers (the area under the demand curve to the right of the equilibrium quantity). The area above the demand curve and below the supply curve for quantities beyond the equilibrium quantity represents the deadweight loss.
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Economics is most importantly concerned with: a. how to profit from trading in the stock market
b. government taxation and spending. c. studying how we allocate scarce resources to satisfy unlimited wants. d. how to successfully launch a business.
Positive statements are: a. prescriptive, making claims about how the world ought to be. b. descriptive, making claims about how the world is
c. optimistic, putting the best possible interpretation on things. d. affirmative, justifying existing economic policy.
Which of the following did Thomas Malthus believe would deter sustained increases in the growth of income per capita?
a. excessive growth of government expenditures
b. rapid growth of population
c. the availability of natural resources
d. adverse climate conditions
If profits are reinvested in the corporation, then
A) payments made to bondholders will be less. B) there are fewer funds available to distribute to stockholders. C) the company will sell more bonds in order to pay dividends to stockholders. D) the high profits indicate that common stockholders will get larger dividends than normal.