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Answer Key, Principles of Microeconomics, 8th Edition — Chapter 9
CHAPTER NINE
Answers to Test Your Understanding Questions
1 If a firm is suffering diseconomies of scale, it is operating at a scale too large for this
type of industry and is therefore experiencing high average costs (brought about by
the high bureaucratic costs associated with big corporations). It could produce at
lower average costs if it could reduce the size of its operations.
2.
Productively efficient output: Q1 (where P = lowest AC);
Allocatively efficient output: Q2 (where P = MC)
3.
Non-rival: c) national defence, e) highways (up to a point);
Non- excludable: b) high seas fisheries, c) national defence.
Both: c) national defence.
4. External costs can be integrated into production costs through legislative controls,
taxation, or a cap and trade system to control pollution emissions.
5.
It’s not really relevant how they spend this extra income; they will still have to pay
the day-care fees, which will be higher in any case. (Similarly, it doesn’t really
matter how the daycare operators spend the extra income if they were the recipients
of the subsidy.)
6.
At $500, operators would offer spaces to 70 000 children. At this price, however,
there would be a surplus of 20 000 spaces, and for this reason, operators would
eventually be forced to drop their fees to $450 (the new equilibrium price).
Answers to Connect Study Problems
1.
a) public good;
c) quasi-public good;
b) private good;
d) private good.
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Answer Key, Principles of Microeconomics, 8th Edition — Chapter 9
2.
See the following figure:
Figure 9.9 (Completed)
Price: $20
3.
quantity: 80. (Where the MPC and MSB curves intersect.)
a) Size 4 plant. (This is lowest average cost - $4.50 - for any size of plant or
output. It is the lowest point on the firm’s LRAC curve.)
b) Output: 600 (This the output that corresponds to the lowest average cost of
$4.50.)
Price: $4.50 (In long-run equilibrium, the price is equal to the
lowest long run average cost.)
4.
a) Price: $3000
(Adding the total bids at this price comes to 40, which is the maximum level of
pollutants.)
b)
Price: $2500
(Adding all the bids, apart from Bidder E, at this price comes to 40, the maximum
level of pollutants.)
Difference: 5 tons
(The amount that the environmentalist group successfully bought but didn’t use.)
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Answer Key, Principles of Microeconomics, 8th Edition — Chapter 9
5.
a) $1400. (Since industry must decrease its pollution levels by 180 tonnes, this is
the quantity that will be demanded. Given the supply of credits in Table 9.3,
equilibrium will be at $1400.)
b) $1000. (A 5 percent reduction in the level of pollution means that now 2280
(2400 minus 120) tonnes of carbon is being produced. Industry must therefore
decrease its pollution levels by only 60 tonnes. Given this lower demand, the new
equilibrium price is where the quantity demanded of 60 is equal to the quantity
supplied as in Table 9.3.)
6.
See the following figure:
Figure 9.11 (Completed)
2
4
6
8
10
12
Number of vehicles per day
(tens of thousands)
b)
120 000 vehicles. (This is the total quantity demanded at a fee of zero.)
c)
$4 (At this fee the total quantity demanded would be 60 000, i.e. one-half
of the no-fee total);
number of commuter vehicles: 40 000 (The quantity demanded by
commuters at $4.);
number of shoppers: 20 000 (The quantity demanded by shoppers at
$4.).
d)
$6. ( If shoppers are charged $3, quantity demanded would be 30 000.
This would lead to an allocation of 30 000 for commuters. A fee of $6 would
result in this quantity of commuters.
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Answer Key, Principles of Microeconomics, 8th Edition — Chapter 9
7.
8.
a)
P = $20;
Q = 80 (Where MPC and MPB intersect.)
b)
P = 30;
Q = 60 (Where MSC and MPB intersect.)
c)
P = 25;
Q = 90 (Where MPC and MSB intersect.)
d)
P = 35;
Q = 70 (Where MSC and MSB intersect.)
a) 1000 tons. (Extend the table to a price of zero, quantity demanded would
increase to 1000.)
b) 400 tons; government revenue: $1 200 000 (400 tons x $3000 per ton.)
c) 200 tons (The new quantity demanded at a fee of $3000);
government revenue: $600 000 (200 tons x $3000 per ton.)
d) $2 000 (To increase the level of pollutants to 400 tons, this is the fee that
needs to be charged to produce that quantity demanded.);
government revenue: $ 800 000 (400 tons x $2000 per ton.)
9.
a)
See the following figure:
Figure 9.13 (Completed)
b)
Price: $120; quantity: 12 (Where MSC and MSB curves intersect.)
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Answer Key, Principles of Microeconomics, 8th Edition — Chapter 9
10.
c)
Value of subsidy: $30 (To get the MPC curve to intersect the MPB
curve at 12 it needs to shift right by 1 square – or shift down by 3 squares,
or by $30.)
d)
Value of subsidy: $30 (To get the MPB curve to intersect the MPC
curve at 12 it needs to shift right by 4 square – or shift down by 3 squares,
or by $30.)
a)
Price: $600; quantity: 8. (Where MPC and MPB intersect.)
b)
Value of external benefits: $200 (The difference between the MSB and
MPB curves.);
Value of external costs:
and MPC curves.)
c)
Value of external benefits: $1600; ($200 x 8.)
Value of external costs:
11.
$500. (The difference between the MSC
$4000. ($500 x 8.)
d)
Price: $1000;
quantity: 6 (Where MSC and MSB intersect.)
a)
Gothum’s fee: $1000;
quantity: 2500 (Where the quantity
demanded equals the quantity supplied.)
Camdon’s fee: $1000;
quantity: 2500 (Where the quantity
demanded equals the quantity supplied.)
b)
(Reduce the quantities demanded by 400 throughout the second column)
Gothum’s fee: $800;
Camdon’s fee: $900;
quantity: 2300
quantity: 2200
Reason for the difference: the supply in Camdon is more elastic than in
Gothum so a change in demand has a bigger impact on quantity but a
smaller impact on price in Camdon than it does in Gothum
c)
Gotham’s subsidy: $600
Camdon’s subsidy: $400
Reason for the difference: The supply is more elastic in Camdon and
therefore requires less of a subsidy (and therefore less of an increase in
price) to encourage more beds.
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Answer Key, Principles of Microeconomics, 8th Edition — Chapter 9
Answer to Comprehensive Problem
a)
See the following figure:
Figure 9.15 (Completed)
b) Ideal number of students: 1000. (Where the MSB intersects the MPC curve.)
c) See Figure 9.15 (Completed).
d)
Optimum number of students: 900. (Where the MSB intersects the MSC
curve.)
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