Question

Question 1

Which of the following can be explained by our ‘economic decision rule’ from chapter 1?

a) If MUx/Px < MUy/Py a consumer should consume more y and less x

b) A firm maximizes profits when MR=MC

c) All of these can be explained by the economic decision-making rule

d) If MSB(x)> MSC(x) then society is producing/consuming an inefficient amount of good z

e) No answer text provided. (wrong)

Question 2

If a good exhibits a negative externality, which would be the most likely government correction?

a) Implement an appropriate price ceiling. (wrong)

b) Subsidize the prodcution of the good.

c) Implement a tax on the producer of the good

d) All of the listed. e) Subsidize the consumption of the good.

Question 3

Which would definitely not be an example of price discrimination?

a) A doctor charges for services according to the income of patients.

b) A coffee company charges higher prices for its certified organic coffee beans than for its non-certified beans.

c) The county fair charges an entry fee and then requires you to purchase tickets to go on rides and play the carnival games. (wrong)

d) Textbook companies charge higher prices for students in the US than for students in India.

Question 4

Which of the following would not be considered a source of market failure?

a) The market for a new mode of transportation, teleportation, has a single firm selling the required teleportation devices (wrong)

b) The government institutes a price floor on a perfectly competitive market

c) Car shoppers do not know the repair or accident histories of the available used cars for sale

d) Chemicals used in the ‘hydro-fracking’ production process pollute community water supplies

Answer 1

Question 1) Option a) If MUx/Px < MUy/Py a consumer should consume more y and less x.

If the Marginal Utility per price of a certain good say in this case y is higher than another good which is in this case x, the person should consume more of the good from which he gets more marginal utility per price until and unless it is equal to the marginal utility per price of the other good which is x. So, a consumer should consumer more y and less x if MUx/Px < MUy/Py.

Question 2) Option c - Implement a tax on the producer of the good.

If a good exhibits a negative externality, the most likely government correction would be to implement a tax on the producer of the good because with the tax, the producers pay the negative social cost that is incurred to the society and in this way the quantity produced also decreases.

Question 3) Option b - A coffee company charges higher prices for its certified organic coffee beans than for its non-certified beans.

Price discrimination is a strategy that charges different consumers different prices for selling the same product or a same service. Here, the coffee company doesn't distinguish between consumers for a same product instead it charges higher prices for its certified organic coffee beans than for its non-certified beans, i.e. it charges different prices for different products. So, it is not an example of price discrimination.

Question 4) Option b - The government institutes a price floor on a perfectly competitive market.

In a perfectly competitive market, the producers are price takers which means that each firm should charge the same price which is the equilibrium price of the market. Since the demand curve is horizontal in this form of market, so with the imposition of price floor, there is no surplus of goods produced and hence there is no deadweight loss. Hence, imposing a price floor on a perfectly competitive market is not considered to be a source of market failure.