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CAS EC 101 Chapter Notes - Chapter 7: Externality, Market Failure, Organ Trade

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3 Nov 2017
School
Boston University
Department
Economics
Course
CAS EC 101
Professor
Todd Idson

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CAS EC 101 Full Course Notes
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Document Summary

How the allocation of resources affect economic well-being. Amount gained when the buyer pays less than expected. Willingness to pay the maximum amount a buyer will pay for a good. Producer surplus when sellers sell at a higher price than expected, the extra money they make. Cost willingness to sell, value of everything a seller gives up to produce a good. Planner all knowing, all powerful, well-intentioned dictator, in a free market, best policy is laissez faire. Efficiency resource allocation, maximizing total surplus (how big is the economic pie) Equality uniform distribution (how is the pie split) Smith"s invisible hand, letting people do what they do. Takes in information and guides everyone to optimal outcome. Market assumptions : perfectly competitive, outcome only matters to the buyers and sellers in that market. Market power is controlled by a single seller or a small group.

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Related Questions

True or False:

1. Consumer surplus is the buyer's willingness-to-pay minus the seller's opportunity cost of production.

2. If your willingness-to-pay for a hamburger is $3 and you paid $2, then your consumer surplus is $5.00

3. The opportunity cost of production for a seller includes the implicit cost of the seller's time.

4. The height of the supply curve at a selected quantity is the seller's opportunity cost of producing that marginal unit.

5. Total surplus (total well-being) is the seller's cost of production minus the buyer's willingness-to-pay.

6. The competitive market equilibrium outcome is efficient because it allocates the produced output to the buyers who place the highest value on the good

7. Producer surplus is the area above the supply curve and below the price.

8. The competitive market equilibrium outcome maximizes total surplus (total well-being)

9. Producing and consuming more of a good will always increase the total surplus(total well-being).

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

PLEASE ANSWER EACH QUESTION WITH A, B, C, and D. NOT ANSWERING ALL QUESTIONS OR INCORRECT ANSWERS WILL RESULT IN A THUMBS DOWN.

Question 1: Which of the following is not needed for price discrimination to be possible?

   

A. The firm must have market power.
   

B. The firm must be able to prevent resale and arbitrage.
   

C. The firm must eventually learn about its customers' demands.
   

D. The firm's customers must have different demand curves.

 

Question 2: Relative to standard monopoly pricing, first-degree price discrimination results in:

  A.

higher consumer surplus, higher producer surplus, and higher total surplus.
  B.

lower consumer surplus, higher producer surplus, and higher total surplus.
  C.

lower consumer surplus, higher producer surplus, and lower total surplus.
  D.

lower consumer surplus, lower producer surplus, and lower total surplus.

 

Question 3: Relative to perfect competition, first-degree price discrimination results in:

   

A. higher consumer surplus, higher producer surplus, and higher total surplus.
   

B. lower consumer surplus, higher producer surplus, and equal total surplus.
   

C. lower consumer surplus, higher producer surplus, and equal total surplus.
   

D. lower consumer surplus, lower producer surplus, and lower total surplus.

Question 4: If market demand is P = 100 - Q and the firm has a constant marginal cost of 20, then with first-degree price discrimination, the firm's producer surplus will be:

A.

$800.
B.

$1,600.
C.

$2,400.
D.

$3,200.

Question 5: For third-degree discrimination to be possible, which of the following features is not required?

   

A. market power
   

B. prevention of resale
   

C. identification of each customer's demand before purchase
   

D. customers with different demand curves

 

Question 6: A golf course has frequent players whose demand is Qf = 260 - 0.4P and infrequent players whose demand is Qi = 10 - 0.1P. The combined market demand is Q = 34 - 0.4P. The marginal cost and average total cost of providing a round of golf are $20. How much higher will the profit be if the golf course uses third-degree price discrimination instead of charging all golfers the same price?

A.

$0
B.

$7.50
C.

$10
D.

$110

 

Question 7: An airline sells seats on its flights to business travelers whose demand is QB = 300 - P and vacation travelers whose demand is QV = 150 - 0.5P. The combined market demand is Q = 450 - 1.5P. The marginal cost and average total cost of providing a seat on a flight are $200. How much higher will profit be if the airline uses third-degree price discrimination instead of charging all travelers the same price?

A.

$0
B.

$250
C.

$400
D.

$1,000

 

Question 8: If a firm practices third-degree price discrimination, the price charged should be higher in the market where demand is:

  A.

Higher.
  B.

Lower.
  C.

More price elastic.
  D.

Less price is elastic.

 

Question 9: The key difference between markets where third-degree price discrimination is possible and markets where second-degree price discrimination is possible is whether:

   

A. resale is possible.
   

B. customers have the same demand curves.
   

C. firms have market power.
   

D. firms can identify customers' demand before the customers make a purchase.

 

Question 10: For price discrimination via a quantity discount to work:

   

A. customers who purchase larger quantities must have relatively elastic demand.
   

B. customers who purchase larger quantities must have relatively inelastic demand.
   

C. customers who pay a relatively high price must have relatively elastic demand.
   

D. customers who pay a relatively low price must have relatively inelastic demand.

 

Question 11: A firm wants to offer a quantity discount to price-discriminate between buyers who are relatively uninterested in the product and buyers who are obsessively interested in it. The uninterested customers have a demand of QU = 30 - 0.5P. The package offered to them contains 10 units of the good at a price of $40 each. Which of the following packages designed for obsessed customers is incentive compatible?

  A. 

60 units at a price of $10 each
  B.

40 units at a price of $10 each
  C.

60 units at a price of $20 each
  D.

40 units at a price of $20 each

 

Question 12: Which of the following conditions do not have to be met in order for indirect price discrimination by versioning to work?

   

A.The firm's customers must have different demand curves.
   

B. The marginal costs of producing each version of the product must be the same.
   

C. The firm must be able to prevent resale.
   

D. The firm must have market power.

 

 

Willingness to pay (per month)
 

Weight machines

Indoor pool

Abe

$60

$50

Betty

50

125

Chris

25

140

 

QUESTION 13
This table shows the willingness to pay off the only three potential customers of a firm that runs both a weight room and an indoor swimming pool. The weight room and pool each have a constant marginal cost of $20 per month. Which of the following pricing strategies yields the highest producer surplus?

   

A. $60 for the weight room, $140 for the pool, or $175 for both
   

B. $50 for the weight room, $125 for the pool, or $165 for both
   

C. $25 for the weight room, $50 for the pool, or $70 for both
   

D. $60 for the weight room, $130 for the pool, or $175 for both

 

Question 14: Which of the following features is needed to make bundling a possible price discrimination strategy but is not required for any other price discrimination strategies?

   

A. Customers must have identical demand curves.
   

B. The firm does not learn about customer demand until after purchase.
   

C. Demand for two products must be negatively correlated.
   

D. The firm must not have market power.

 

Question 15: Which of the following features is not needed for price discrimination using a two-part tariff to work?

   

A. The firm must have market power.
   

B. The firm must be able to prevent resale.
   

C. The firm must learn about its customers' demands before purchases are made.
   

D. The firm's customers must have different demand curves.

 

Question 16: A firm faces a market demand curve P = 50 - 5Q. It has a constant marginal cost of $10. Relative to standard monopoly pricing, how would a block pricing strategy where the first four units can be purchased for a price of $30 each, but two more units can be purchased for an additional $20 each change consumer surplus and producer surplus?

   

A. Consumer surplus would decrease by $10, and producer surplus would increase by $20.
   

B. Consumer surplus would increase by $10, and producer surplus would increase by $20.
   

C. Consumer surplus would increase by $20, and producer surplus would increase by $10.
   

D. Consumer surplus would increase by $20, and producer surplus would increase by $20.

 

Question 17: Relative to standard monopoly pricing, block pricing:

   

A. decreases consumer surplus, increases producer surplus, and increases total surplus.
   

B. increases consumer surplus, increases producer surplus, and increases total surplus.
   

C. decreases consumer surplus, increases producer surplus, and decreases total surplus.
   

D. decreases consumer surplus, decreases producer surplus, and decreases total surplus.

 

Question 18: Which of the following results in the highest amount of producer surplus?

  A.

bundling
  B.

third-degree price discrimination
  C.

block pricing
  D.

two-part tariffs

 

Question 19: Which of the following results in the highest amount of consumer surplus?

  A.

first-degree price discrimination
  B.

third-degree price discrimination
  C.

block pricing
  D.

two-part tariffs

 

Question 20: Which of the following results in the highest amount of total surplus?

  A.

third-degree price discrimination
  B.

block pricing
  C.

first-degree price discrimination
  D.

bundling