Question 1. (4 marks)
Pro Factory produces a toxic waste by-product. If Pro dumps it in the river, it causes damage to Brandon, a fisherman located downstream. The toxins are short-lived and cause no damage to anyone other than Brandon. At a cost, Pro can filter out the toxins, in which case Brandon will suffer no damage at all. The relevant gains and losses for the two individuals are listed below.
Costs and benefits of eliminating toxic waste
Without filter With filter
Gains to Pro $120 per day $100 per day
Gains to Brandon $30 per day $80 per day
If the law does not penalize Pro for dumping waste in the river, and if Pro and Brandon cannot communicate with each other, will Pro operate with or without filter? Is that choice socially efficient, and if not, how much is it different from the efficient surplus? How is the daily cost of filter to Pro compared to the benefits to Brandon?
Question 2. (4 marks)
A village has 5 residents, each of which has accumulated savings of $100. Each villager can use the money to invest at a bank that offers 11% interest per year or to buy a year-old steer, send it onto the commons to graze, and sell it after one year. The price the villager will get for the 2-year-old steer depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of steers sent onto the commons, as shown below.
The relationship between herd size and steer price
Number of steers
on the commons Price per 2-year-old
Steer ($) Income per steer
1 127 27
2 120 20
3 115 15
4 111 11
5 109 9
The price of a 2-year-old steer declines with the number of steers grazing on the commons because the more the steers, the less grass available to each. The villagers will make their investment decisions one at a time, and the results are public. If each villager decides how to invest individually, (a) how many steers will be sent onto the commons, and (b) what will be the village’s total income?
Question 3. (4 marks)
Analyse what happens to the market for pizza if the price of tomatoes rises. Analyse what happens to the market for pizza if the price of hamburgers falls. Use diagrams to explain.
Question 4. (5 marks)
If Farmer Jones plants no seeds on his farm, he gets no crop. If he plants one bag of seeds, he gets 5 kg of wheat. If he plants two bags, he gets 8 kg. If he plants three bags, he gets 10 kg. A bag of seeds costs $10 and seeds are his only cost. Use these data to graph the farmer’s production function and total-cost curve. Explain their shapes.
Question 5. (4 marks)
Suppose Early Settlers’ total cost of producing four sets of sofas is $275,000 and its total cost of producing five sofas is $320,000. What is the average total cost of producing five sets of sofas? What is the marginal cost of the fifth set? Draw the marginal-cost curve and the average-total-cost curve for a typical firm and explain why these curves cross where they do.
Question 6. (4 marks)
In the long run with free entry and exit, is the price in a market equal to marginal cost, average total cost, both or neither? Explain with a diagram.
Question 7. (1+2+2 marks)
The market for blueberries is perfectly competitive. Firms in the market are producing output but are currently incurring economic losses.
(a) How does the price of blueberries compare to the average total cost, the average variable cost and the marginal cost of producing blueberries?
(b) Draw two graphs, side by side, illustrating the present situation for the typical firm and for the market?
(c) Assuming there is no change in either demand or the firms’ cost curves, explain what will happen in the long run to the price of blueberries, marginal cost, average total cost, the quantity supplied by each firm and the quantity supplied to the market.