Microeconomics homework

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Economics

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Microeconomics.docx

Six questions, divided into various parts. Need the work to be done in detail. Please view the attachment. Thankyou.

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Answer all questions. All questions are weighted equally. 1. a) Define the equilibrium of a market. Clearly describe the forces that move the market towards its equilibrium. Use appropriate diagrams to illustrate your answer. [40% of marks for this question] b) Suppose the government imposes a tax on the sale of a good. i. Draw an appropriate demand and supply diagram to show the deadweight loss and tax revenue. ii. Explain why the imposition of the tax results in a deadweight loss. iii. How do the elasticities of demand and supply affect the deadweight loss of a tax? Explain your answer clearly. [60% of marks for this question] 2. a) What are the three main assumptions of perfect competition? Whatare the implications of these assumptions for a competitive firm’s average revenue and marginal revenue? What are the implications ofthese assumptions for a competitive firm’s long run profit? [40% of marks for this question] b) For a given market price, draw a clear and well labelled diagram of a perfectly competitive firm earning excess profit in the short run. Describe the adjustment process from this short-run equilibrium position to the long-run equilibrium in the market. Use clear and well labelled diagrams to illustrate your answer. [60% of marks for this question] 3. a) Draw a typical consumer’s indifference curves for beer and pizza. Explain four properties of these indifference curves. [30% of marks for this question] b) Poppyhas an income of £80 which she spends on two goods, beer and pizza.Beer costs £4 a pint and pizza costs £2 a slice. Draw Poppy’s budget constraint. On your diagram, draw an indifferencecurve showing Poppy’s optimal consumption choice. [10% of marks for this question] c) Now assume the price of pizza falls. If pizza is assumed to be an inferior good, explain and illustrate the income and substitution effects of this price change and how they sum to secure Poppy’s new utilitymaximising equilibrium. [60% of marks for this question] 4. a) What is a natural monopoly and why does it arise? With a clear and well labelled diagram, explain the output and pricing decisions of a natural monopoly and show the profit earned by this natural monopolist. [50% of marks for this question] b) Draw a diagram and explain in words the equilibrium of a natural monopoly that isregulated by marginal-cost pricing. [40% of marks for this question] c) In the case of a natural monopoly, what are the problems of marginalcost pricing as a regulatory system? Givepossible solutions for these problems. [10% of marks for this question] 5. a) Explain, with reference to examples, what is meant by a positive and negative externality. [20% of marks for this question] b) Using an example, explain the difference between private and social costs. Using an example, explain the difference between private and social benefits. [20% of marks for this question] c) Using an appropriate diagram, explain the divergencebetweenthe market equilibrium and the social optimum in the case of a negative externality. [20% of marks for this question] d) Usingan appropriate diagram, explain the divergence between the market equilibrium and the social optimum in the case of a positive externality. [20% of marks for this question] e) Discuss the main public policies a government may use to solve the problem of externalities. [20% of marks for this question] 6. a. Explain how a firm’s production function is related to the value of the marginal product of labour. Explain how a firm’s value of marginal product is related to its demand for labour. [40% of marks for this question] b. Suppose the government proposes a new law aimed at reducing health care costs: all citizens are to be required to eat an apple a day. With the use of clear and well labelled diagrams, explain the following. i. How would this apple-a-day law affect the demand and equilibrium price of apples? ii. How would the law affect the marginal product and the value of the marginal product of apple pickers? iii. How would the law affect the demand and equilibrium wage for apple pickers? [60% of marks for this question]
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