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Introduction

Student Practice Manual to Accompany Microeconomics B. Douglas Bernheim Michael Whinston Created by: Jennifer Pate, Ph.D. Loyola Marymount University Table of Contents Chapter 1 Page 3 Additional Exercises for Chapter 1 4 Chapter 2 5 Additional Exercises for Chapter 2 7 Chapter 3 11 Additional Exercises for Chapter 3 14 Chapter 4 18 Additional Exercises for Chapter 4 21 Chapter 5 27 Additional Exercises for Chapter 5 33 Chapter 6 44 Additional Exercises for Chapter 6 51 Chapter 7 57 Additional Exercises for Chapter 7 59 Chapter 8 65 Additional Exercises for Chapter 8 69 Chapter 9 73 Additional Exercises for Chapter 9 78 Chapter 10 82 Additional Exercises for Chapter 10 85 Chapter 11 89 Additional Exercises for Chapter 11 93 Chapter 12 99 Additional Exercises for Chapter 12 102 Chapter 13 109 Additional Exercises for Chapter 13 111 Chapter 14 115 Additional Exercises for Chapter 14 117 Chapter 15 122 Additional Exercises for Chapter 15 124 Chapter 16 128 Additional Exercises for Chapter 16 130 Chapter 17 134 Additional Exercises for Chapter 17 136 Chapter 18 141 Additional Exercises for Chapter 18 144 Chapter 19 150 Additional Exercises for Chapter 19 152 Chapter 20 155 Additional Exercises for Chapter 20 157 Chapter 1 Sample Problems 1. Government intervention in markets is a politically divisive issue. What are some potential justifications of government intervention in markets? Answer: Government intervention in markets is potentially justifiable when market failures occur. In a case where there is little competition in a market, the government could step in and regulate prices so that consumers are not unjustly hurt by lack of competition in a market. The government could also intervene in markets to bridge the gap between buyers and sellers created by a lack of information. In such cases, the government could impose regulations and mandates on disclosure of information. Also, inequality across customers in a market could justify a government to implement policies to redistribute resources more equitably. ...read more.

Middle

What is the deadweight loss of the tax? 4. The market demand function for pizza slices isand the market supply function is. Suppose the government imposes a $0.30 tax on the sellers of each pizza slice. Calculate the consumer surplus, producer surplus and aggregate surplus at the competitive market equilibrium for before and after the tax. What is the deadweight loss of the tax? 5. The market demand function for refrigerator magnets isand the market supply function is. Suppose the government imposes a $0.50 tax on the sellers of each refrigerator magnet. Calculate the consumer surplus, producer surplus and aggregate surplus at the competitive market equilibrium for before and after the tax. What is the deadweight loss of the tax? 6. Which of the following sets of elasticities would result in the largest deadweight loss: (1) [5, 1.2], (2) [2, 0.2], (3) [0.8, 1], (4) [1, 1.4]? Briefly explain why. 7. The market demand function for pizza slices isand the market supply function is. Suppose the government grants an 18 cent subsidy for the sellers of each pizza slice. Calculate the consumer surplus, producer surplus and aggregate surplus at the competitive market equilibrium for before and after the subsidy. What is the deadweight loss of the subsidy? 8. The market demand function for pizza slices isand the market supply function is. Suppose the government wants to raise the price of a slice of pizza to $3.00 and is debating between a price floor, a price support program, a quota, and a voluntary production reduction program. They hire an economist (you!) to describe what each action would entail. Briefly explain how each program would work for this market and calculate the resulting deadweight loss. 9. The market demand function for pizza slices isand the market supply function is. Suppose the government wants to raise the price of a down blanket to $120 and is debating between a price floor, a price support program, a quota, and a voluntary production reduction program. ...read more.

Conclusion

The deadweight loss is found by computing the area of the triangle. 7. An emission standard is a legal limit on the amount of pollution that a person or entity can produce from a particular activity. In order for the government to set an efficient emission standard it needs to know precisely the polluter's cost of abatement and the social costs. Thus, both sides have an incentive to overestimate the costs. On the one hand, the polluter will overestimate their cost of abatement so that the government places higher emission standards. The pollutee has the incentive to overestimate the social cost of emissions so that the government sets a lower emission standard. 9. The efficient number of gnomes is found by equating the marginal benefit to the marginal cost. At the efficient level of gnomes your marginal cost is $8. Therefore, an efficient Pigouvian tax is $8 per gnome. With such a tax your neighbor will choose to only 8 gnomes and will pay a total of $48 dollars to have the gnomes running free in the garden. 11. A liability rule is a legal principle that forces polluters that create an externality to compensate the affected parties for some or all of their losses. So a liability rule would make a polluter internalize the marginal cost of the externality they create. One of the difficulties that arise with implementing a liability rule are legal fees which are costly and time consuming. 13. First, we must compute the MSB of having plants in the classroom. Now we set MSB = MC: Thus the socially efficient number of plants is 16. To find what each student would chose individually set MB =MC: Individually each student would choose to have 12 plants. If you notice, at Q = 16 the marginal cost exceeds the marginal benefit, such that each student will have an incentive to reduce the number of plants. The break-even point between marginal cost and marginal benefit is where Q = 12. 15. ...read more.

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