Public Goods
Supplemental Instruction
Iowa State University / Leader: / Veronica
Course: / Econ 101
Instructor: / Kreider
Date: / 11-18-14
1. Fill in the Chart
Define: / Define in your own words: / ExamplePublic Good
Private Goods
“Free-rider problem”
2. Review the example in the section on “The Coase Theorem,” where the resident’s harm was greater than the truck driver’s benefit from using the shortcut. Suppose the situation were reversed. Specifically, suppose that the truck driver gains $12 by using the shortcut, and the harm to the resident is $7
a. Is it efficient for the truck driver to stay on the highway and not use the shortcut? Briefly, why or why not?
b. If the truck driver has the legal right to use the shortcut, would you expect the resident to offer him a sufficient side payment to get him to stay on the highway? Why or why not?
c. If the resident has the legal right to block the truck driver from using the shortcut, would you expect the truck driver to stay on the highway? Why or why not?
3. A beekeeper is a price taker in the market for honey. At the profit-maximizing output level, the beekeeper earns $20 in revenue per day, but has costs of $30 per day—not enough to stay in business. It turns out, however, that the bees can create a positive externality by pollenating a neighboring farmer’s crops—if the beekeeper positions the hives near the farmer’s field. The pollination would provide benefits of $15 per day for the farmer.
a. Is it economically efficient for the beekeeper to keep operating? Why or why not?
b. If the beekeeper has the legal right to charge the farmer for “pollination services,” would we expect the farmer and beekeeper—without government intervention—to arrive at the efficient outcome? Explain briefly. [Hint: The Coase theorem applies.]
c. If the farmer has the legal right to enjoy “pollination services” without paying, would we still expect the farmer and beekeeper—without government intervention—to arrive at the efficient outcome? Explain briefly.
Review Questions:
4. Sunk Costs:
a. Are costs that cannot be avoided by shutting the business down
b. Are costs that very with the level of output
c. Are always associated with heavy machinery
d. Stay the same the same in the ling run as in the short run
5. Which of the following is not associated with a perfectly competitive industry?
a. Firms aggressively advertising the unique features of their differentiated products
b. Firms passively taking the market price as given
c. Free entry into the industry by new firms
d. All of the above are associated with perfectly competitive industries
6. An industry’s long-run supply curve will be upward sloping if:
a. New firms may enter but firms have different levels of minimum average costs
b. New firms may enter and all firms have the same technology but input prices will get bid up as the number of firms grows
c. The number of firms is fixed and each has an upward sloping firm supply curve
d. Any of the above can be true
In the figure, assume that average total costs and marginal costs are the same in the long and short runs.
7. At which of the following prices would a competitive firm stay in business in the short run but not in the long run?
a. 3
b. 5
c. 8
d. None of the above
8. At which of the following prices would a competitive firm stay in business in the long run but not in the short run?
a. 3
b. 5
c. 8
d. None of the above
Assume Mama Mia Pizza has: TR=12Q, where Q = # of pizzas sold & TC=2000 + 2Q
9. What is Mama Mia’s AFC if they sell 100 pizzas?
a. $120
b. $2000
c. $20
d. $22
10. How many pizzas must Mama Mia sell in order to break even?
a. 100
b. 200
c. 167
d. 143