Reference no: EM132376679

SECTION "A"

Answer the below questions.

1. A market failure occurs when the supply of a good or service is insufficient to meet demand. This results in an inefficient distribution of resources among market participants. Hence, govermnent need to intervene to bring efficiencies. Explain any four tools available for government interventions to deal with the market failures and which one will be applicable in the given situation.

a. Somewhere in the United States, there is a steel plant located next to a river. This plant produces steel products, but it also produces "sludge," a by - product useless to the plant owners. To get rid of this unwanted by - product, the owners build a pipe out the back of the plant and dump the sludge into the river. The sludge produced is directly proportional to the production of steel; each additional unit of steel creates one more unit of sludge as well.

2. Suppose that the market demand for potatoes is given by Q = 1000 - 250P and the market supply of potatoes is given by Q = 150P, where P is the price per bag of potatoes and Q is the number of bags per month.

a. What are the equilibrium price and quantity for potatoes? Illustrate your answer graphically.
b. What is the consumer surplus at the equilibrium in part (a)? Indicate the area of consumer surplus in the diagram from part (a).
c. What is the producer surplus at the equilibrium in part (a)? Indicate the area of consumer surplus in the diagram from part (a).
d. In the context of the problem, provide three reasons why the demand for potatoes might increase.
e. In the context of the problem, provide three reasons why the supply of potatoes might decrease.

3. The cigarette taxes are a way to reduce smoking. Now think about the markets for other tobacco products such as cigars and chewing tobacco.
a. Are these goods substitutes or complements for cigarettes?
b. Using a supply-and-demand diagram, show what happens in the markets for cigars and chewing tobacco if the tax on cigarettes is increased.
c. If policymakers wanted to reduce total tobacco consumption, what policies could they combine with the cigarette tax?

4. How does price discrimination reduce the amount of consumer surplus? By price discriminating the company charges some people a lower price, so how can this reduce consumer surplus?

5. The Organization of Petroleum Exporting Countries (OPEC) raised the price of crude oil in world oil markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. Long lines at gas stations became commonplace, and motorists often had to wait for hours to buy only a few gallons of gas.

a. What was responsible for the long gas lines? Most people blame OPEC. Surely, if OPEC had not raised the price of crude oil, the shortage of gasoline would not have occurred. Yet economists blame government regulations that limited the price oil companies could charge for gasoline.

SECTION "B"

Answer the below questions. Each question carry 20 marks.

1. In a small college town, Laura's Bookstore has a monopoly in selling textbooks. Laura's fixed costs are $100, and her total costs are shown in table given below
a. Complete Table by computing average total cost, marginal cost, Total Revenue, and Marginal Revenue.
b. Lists points on the demand curve facing Laura's Bookstore.
c. What is Laura's profit-maximizing quantity of output? At what price will she sell her books? What is her total economic profit?
d. Show the equilibrium output and price. On your diagram, illustrate the area that equals Laura's economic profit.

Quantity of Books (per hour)	Total Cost	Average Cost	Marginal Cost	Price (dollars per book)	TR	MR
9	247	27.44	9.00	57		47
10	256			56
11	267			55
12	280			54
13	295			53
14	312			52
15	331			51
16	352			50
17	375			49
18	400			48
19	427			47
20	456			46
21	487			45

2. Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward and the market for pretzels is in long-run competitive equilibrium.

a. Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand.

b. Now the city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating? Use graphs to illustrate your answer.

c. Suppose that the city decides to charge a license fee for the 800 licenses. How will this affect the number of pretzels sold by an individual stand, and the stand's profit? The city wants to raise as much revenue as possible and also wants to ensure that 800 pretzel stands remain in the city. By how much should the city increase the license fee? Show the answer on your graph.