Reference no: EM133067641

1. State whether each of the following statements are TRUE or FALSE. For each statement, give a brief explanation.

a. If the total cost is rising with output, then marginal cost must be rising too.

b. The total cost of producing 100 and 105 units of output is $1,200 and $1,180 respectively.

c. When a firm produces 100 units of output, its total cost is $200, and its total fixed cost is $50. Then the corresponding average variable cost is $1.5.

d. When a firm produces 60 units of output, its total fixed cost is $120. Then its average fixed cost must be $2 for all output level.

e. In the short run, if the firm employs the fifth unit of labour, the marginal product of labour is 10 units of output. If the firm employs the sixth unit of labour, the marginal product of labour is 8 units of output. Then the marginal cost for the corresponding output must be falling.

2. Most e-cigarettes contain nicotine, which causes addiction and may harm brain development. To discourage citizens from spending too much money on harmful e-cigarettes, the government imposes a per-unit tax for each unit of ecigarettes sold by the seller.

a. Does the demand for e-cigarettes tend to be elastic or inelastic? Why?

b. Use a well-labelled supply and demand diagram to show the effect of the tax on the price buyers pay, the price sellers receive, and the quantity transacted in the e-cigarette market.

c. Using your answers to part a and b, verbally explain whether the tax successfully reduces citizens' spending on e-cigarettes or not.

d. Another government policy to reduce its spending is educating citizens about the harmful risk of using e-cigarettes. Can this policy better achieve the government's aim compared with the tax? Explain.