AL Econ Micro by Topic

8/11/2019 AL Econ Micro by Topic

1/57

Unit 1 The Scope of Economic Analysis

(i) Basic Economic Problems

1. Scarcity implies

A. there is no such thing as a free good.

B. competition is inevitable.

C. a lack of proper planning.

D. price is the only viable criterion for the allocation of resources.

(8!"#$

%. &hich one of the follo'ing statements about economic goods is A)S*+

A. An economic good is a good for 'hich the amount available is less than

amount people 'ant at ,ero price.

B. An economic good is a good that is sub-ect to competition.

C. An economic good is a good for 'hich more of it is not preferred.

D. one of the above. (8!1"$

/. &hich of the follo'ing statements about competition is A)S*+

A. &aiting in line is a form of competition.

B. 0he rules of competition dene the criteria that determine 'ho 'ins and 'ho

loses.

C. 2rice is the main criterion of competition in a free enterprise economy.

D. 0here is no competition in a socialist economy because resource allocation is

determined by the government. (8!18$

3. 0he 4pen )earning 5nstitute accepted only / """ students out of #" """

applicants. &hich of the follo'ing methods of allocating the places 'ould be

discriminatory+

A. irst come6 rst served.

B. 7aising the entrance reuirements until only / """ applicants 'ere eligible.

C. 7andom selection by computer.

D. All of the above. (9"!18$

1


2/57

:. &hich of the follo'ing describe(s$ a ;shortage


3/57

C. is a good the supply of 'hich is so abundant that more of it is not preferred.

D. is a gift of nature. (9!"$

1". 5n a one!man economy6

A. scarcity e=ists.

B. competition is inevitable.

C. transaction costs are positive.

D. one of the above. (98!%8$

11. or a resource to be a good6

A. the resource must be limited in uantity.

B. having some of the resource must be preferable to having none of it.

C. there must be competition for the resource.

D. All of the above. (99!"3$

1%. Speeding increases the risk of car accidents. 0he observation that some

drivers do e=ceed speed limits implies

A. safety is not a good for these drivers.

B. safety is a free good for these drivers.

C. these drivers are 'illing to substitute speeding for safety.

D. the postulate of constrained ma=imi,ation cannot be used to analy,e the

behaviour of these drivers. (""!"/$

1/. &hich of the follo'ing statements about scarcity and shortage is correct+

A. Scarcity implies shortage.

B. 0he e=istence of market prices implies scarcity.

C. Shortages are caused by reduction in supply.

D. 0here is no scarcity in a one!man economy. ("%!1$

13. Scarcity

/


4/57

A. is the same as shortage.

B. does not e=ist in a one!man economy.

C. e=ists for any economic good.

D. e=ists for any and all goods. ("/!"1$

1:. Scarcity implies

A. everything is not enough.

B. there is a shortage6 and 'ithout a shortage there 'ill be no price.

C. than an individual is 'illing to sacrice something for something else.

D. a market 'ill emerge. ("3!"1$

1#. Competition 'ill 40 arise if

A. all individual are identical.

B. there is a monopoly in each and every market.

C. there is no market.

D. all goods are free goods. ("3!"%$

1. &hich one of the follo'ing pairings has terms that are closest in meaning+

A. scarcity and shortage.

B. monopoly and competition.

C. private property and social cost.

D. competition and discrimination. (":!"/$

18. &hich of the follo'ing e=ists in a one!man economy+

A. shortage.

B. 2areto Condition.

C. institution.

D. one of the above. (":!%$

19. 5n a one!man economy6 there 'ill still be

A. property rights.

B. shortage.

3


5/57

C. transaction costs.

D. scarcity. ("#!%3$

20. Scarcity implies

A. the market is the most efficient place for allocating resources.

B. shortage if the market does not exist.

C. the concept of equilibrium is essential.

D. some people must be discriminated against in a society. 0!"0#$

MC Answers on Basic Economic Problems

A C D D D A B D C A

D C B C C D D D D D

:


6/57


7/57

oreign *=change Certicates (*C$ from foreigners according to the same

nominal meter fee6 although dollar for dollar *Cs are 'orth more than 7B

in the black market.

B. edical doctors charge di>erent prices to di>erent patients for the same

treatment.

C. Dollar for dollar6 shops in Shen,hen charge a lo'er price if a customer pays

in *Cs instead of 7B.

D. 0he 07 in ong ong charges students lo'er rates. (8#!":$

:. &hich one of the follo'ing statements about price discrimination is

5C477*C0+

A. 2rice discrimination allo's a producer to capture some or all of the consumer

surplus.

B. A monopolist tends to produce a larger output 'hen practicing price

discrimination than that 'hen he is using only one price.

C. &hen the market demand facing monopolist lies entirely belo' the average

cost curve6 price discrimination may provide su?cient revenue to cover the

cost of production.

D. 2rice discrimination can only occur if there is only one seller of the good.

(8!1%$

#. &hich one of the follo'ing statements about monopoly is 07E*+

A. A monopolist may su>er losses.

B. 2rice discrimination is al'ays less e?cient than the use of one single price.C. A monopolist al'ays produces a smaller output than if the dame good is

produced under competition.

D. onopoly 'ill not e=ist 'ithout government protection. (8!

1/$

. &hich of the follo'ing is 40 an e=ample of price discrimination+

A. or the same treatments6 doctors charge rich patients more than poor ones.

B. iven the same sho'6 a theatre o>ers discounts for students.


8/57

C. Airlines o>er discounts for group tickets.

D. 5n a private school6 scholarships are given to students 'ith better grades.

(88!%:$

8. &hich of the follo'ing statements about price discrimination is A)S*+

A. 2erfect price discrimination is more e?cient than simple monopoly pricing.

B. 2rice discrimination al'ays results in a higher level of sales.

C. 2rice discrimination may occur in one single market if consumers have

di>erent information costs.

D. 2rice discrimination tends to be more common in the sale of services than it

is in the sale of manufactured goods. (89!

%:$

9. &hich of the follo'ing is 40 a case of price discrimination+

A. ree tuition is a'arded to some students in a private college.

B. A theatre o>ers lo'er ticket price to students than to non!students for the

same seats.

C. 0he price per orange is cheaper by the do,en.

D. 0ourists in China are charged more for train or airlines fares than local

people. (89!%$

1". A monopolist practicing perfect price discrimination is said to be economicallye?cient because

A. output is increased and sold at a lo'er marginal price.

B. the consumer surplus is fully e=tracted.

C. the marginal use value of the output euals its marginal cost of production.

D. the average cost of production is at a minimum. (9"!1:$

11. &hich of the follo'ing is 40 an e=ample of price discrimination+

8


9/57

A. A university charges over!aged students higher tuition fees.

B. An electric po'er company charges more for electricity used during peak

hours.

C. 0he ass 0ransit 7ail'ay sells tickets to students at a discount.

D. A dentist charges di>erent patients di>erent fees for the same treatment.

(9"!%8$

1%. &hich of the follo'ing is 40 an e=ample of price discrimination+

A. 0he ass 0ransit 7ail'ay in ong ong charges higher fares at peak hours.

B. or the same treatment6 a doctor charges di>erent fees for di>erent patients.

C. A private university in the Enited States grants di>erent amounts of

scholarship funds to di>erent students.

D. 0he o'loon!Canton 7ail'ay in ong ong charges lo'er fares for students

than for non!students. (91!%8$

1/. &hen a monopolist practices perfect price discrimination6

A. the marginal revenue curve 'ill become a hori,ontal straight line.

B. the demand curve 'ill become the marginal revenue curve.

C. the marginal revenue curve 'ill shift to a position belo' the demand curve.

D. the marginal revenue curve and the average revenue curve 'ill coincide.

(9%!19$

13. &hich of the follo'ing statements about price discrimination is true+

A. 2rice discrimination is less e?cient than simple monopoly pricing.

B. 2rice discrimination tends to result in an average price similar to that ofmonopoly pricing.

C. 2rice discrimination 'ill not occur in one single market6 even if consumers

have di>erent information costs.

D. one of the above. (9/!1:$

1:. Ender monopoly pricing or price searching6

A. output 'ill be higher if perfect price discrimination is adopted.

B. average cost is at a minimum.

9


10/57

C. the marginal value of the good to consumers al'ays e=ceeds the marginal

cost of production.

D. the monopolist earns a return on his capital at a rate higher than the rate of

interest. (9/!1$

1#. A monopolist practicing perfect price discrimination is

A. ine?cient because it e=tracts all consumererent buyers have di>erent demand elasticities.

C. 0here is no competition among sellers.

D. one of the above. (9:!18$

19. &hich of the follo'ing is an e=ample of price discrimination+

A. 0he ass 0ransit 7ail'ay Corporation charges lo'er fares for senior citi,ens.

B. 0he bank charges civil servants lo'er interest rates on mortgage loans.

C. 0he per!litre price of a larger carton of milk is lo'er than that of smaller one.

D. A can of soft drinks is sold at a higher price in a tutorial centre than in

grocery store.

(9:!

%"$

1"


11/57

%". A simple means of price discrimination 'hereby the same type of product is

sold at di>erent prices is to give the various products some such distinguishing

label as economy6 standard and delu=e. 0his is particularly useful 'here the

items cater to di>erent income classes. (Davidson and 7anlett6 icroeconomic

0heory$

A. 0he argument is incorrect because income has nothing to do 'ith demand.

B. 0he argument is correct. 5t is a case of third!degree price discrimination.

C. 0he argument is incorrect. 0he products are not the same6 the market is not

separated6 and a poor consumer may buy the delu=e model.

D. 0he argument is correct. A case in point is the various classes of seats

o>ered by airlines. (9#!1:$

%1. &hich of the follo'ing is 40 price discrimination+

A. edical doctors charge di>erent prices on di>erent patients for the same

treatment.

B. 5n the Enited States6 rst!run movies are priced higher than 'hen the same

movies are sho'n later as second runs.

C. A private college charges a F%" """ tuition fee6 but gives almost ever

student a scholarship of varying amounts depending upon needs.

D. 0he Star erry in ong ong does not charge senior citi,ens any fares.

(9#!/"$

%%. &hich of the follo'ing is an e=ample of price discrimination+

A. 0a=i drivers raise their fares during typhoons and rainstorms.

B. 0he charge per -ourney for passengers using 07 stored!value ticket is lo'er

than that for passengers using one!'ay tickets.C. A supermarket o>ers a higher discount to customers 'ho buy cup noodles in

bulk.

D. A physician charges 'ealthy patients more than poor patients for the same

medical treatment.

(9!%/$

%/. A price searcher practicing perfect price discrimination 'ill produce at an

11


12/57

output level 'here

A. total revenue is ma=imi,ed.

B. the average cost curve cuts the marginal cost curve.

C. the rate of return on investment is greater than the market interest rate.

D. marginal use value euals marginal cost. (98!%1$

%3. Consider a seller 'ith a constant marginal cost of production as sho'n in the

follo'ing diagram. Ender simple monopoly pricing6 the euilibrium price and

uantity are 21 and G1. 5f the seller adopts all!or!nothing pricing6 the e=tra gain

to him is

A. area 5

B. area 555

C. area 5 and 555

D. area 56 55 and 555 (98!%/$

%:. &hich of the follo'ing is an e=ample of price discrimination+

A. 2roperty agents charge the sellers of Hats commission but do not charge the

buyers.B. A tness centre o>ers certain free services to members only.

C. 0he telephone company charges more for international direct dialing (5DD$

calls during rush hours.

D. 0he ass 0ransit 7ail'ay Corporation charges students lo'er fares.

(99!1:$

1%


13/57

%#. Ender perfect price discrimination6

A. a price searchers< marginal cost curve may be regarded as its supply curve.

B. the marginal use value is higher than the marginal cost.

C. the gain from trade is ,ero at the margin.

D. the marginal revenue curve lies belo' the marginal use value curve.

(99!1:$

%. &ith su?ciently lo' transaction costs6 a monopolist facing an up'ard sloping

marginal cost curve changes from simple monopoly pricing to perfect price

discrimination. or the last unit of output6 the monopolist 'ill produce at a

IIIII marginal revenue and charge a IIIII price.

A. higher ... higher

B. higher ... lo'er

C. lo'er ... higher

D. lo'er ... lo'er (""!1/$

%8. &hich of the follo'ing constitutes price discrimination+

A. Some private doctors charge senior citi,ens less for the same treatment.

B. A bus company charges di>erent prices for di>erent bus routes to the same

destination.

C. e'spapers are sold at a lo'er price in the evening than in the morning.

D. A restaurant charges higher prices for the same dishes during Chinese e'

Jear holidays.("%!%1$

%9. &hich of the follo'ing constitutes price discrimination+

A. A hotel 'ith vacant charges di>erent customers di>erent rates for a similar

or comparable room.

B. An airline charges rst class seats a price four times the price of economy

class seats.

C. A restaurant customer pays a lo'er price per dish if he orders from a set

menu than ordering each dish separately.

D. A cup of co>ee is produced at the same cost as a cup of tea6 but the former

1/


14/57

is often sold at a higher price than the latter.

("/!1%$

/". Ender perfect price discrimination6

A. the marginal revenue curve is the same as the demand curve.

B. the marginal use value euals the marginal cost for the last unit produced.

C. there is no consumer surplus.

D. All of the above. ("/!1/$

/1. &hich of the follo'ing is denitely 40 perfect price discrimination+

A. A seller e=tracts consumer surplus fully from each and every customer.

B. A uniform all!or!nothing price is charged by a seller.

C. any all!or!nothing prices are charged by a seller.

D. Di>erent club members pay di>erent membership fees. ("3!

13$

/%. &hich of the follo'ing is 40 a case of price discrimination+

A. 4ne may bargain 'ith ta=i drivers to get the ta=i fare do'n.

B. Barber shops double the price of a haircut several days before the Chinese

e' Jear holiday.

C. Senior citi,ens pay half fares for sub'ay transportation.

D. Some private universities in the Enited States give certain selected students

partial refunds on their tuition fees already paid.

("3!1:$

//. &hich of the follo'ing is an e=ample of price discrimination+

A. A restaurant sells a chicken for F1.""6 'hich is belo' cost6 and adds the cost

of the chicken to the prices of other dishes. ot all customers order chicken

in this restaurant.

B. All customers bargain 'hen shopping in the same store6 'ith the result that

di>erent customers paying signicantly di>erent prices for the same item.

C. ovie theatres cut the ticket price to half on 0uesdays for the same movie.

D. otel room rates are higher during holiday seasons. (":!

11$

13


15/57

/3. &hich of the follo'ing pricing practices in movie theatres constitutes price

discrimination+

A. 0ickets for the same movie are charged at di>erent prices in di>erent

theatres.

B. Students and senior citi,ens are charged lo'er ticket prices than regular

customers.

C. 0he ticket price for the rst sho' on each day is lo'er than later sho's.

D. All of the above. ("#!18$

/:. All!or!nothing pricing may be regarded as a form of perfect price

discrimination if

A. the average costs for all customers are eual.

B. the marginal costs for all customers are eual.

C. di>erent all!or!nothing prices are charged by a seller to di>erent customers.

D. the marginal receipts from each and all customers are eual.

("#!19$

#%. Consumer surplus is necessarily extracted &hen

A. the same price is charged to all customers.

B. different customers are charged different prices.

C. customers bargain at the same shop.

D. an entrance fee is required before buying. 0!"'($

MC Answers on Price iscrimination

C C B C A C A C C

B A B A C A C

B C C B A A

B B B B C B

1:


16/57

Price iscrimination

1!!1 "# $

%t is often sai& that monopoly pricin' lea&s to ineciency in

pro&ction# *hy is this so+ %t is also ar'e& that monopoly

pricin' wol& be ecient if the cost of pricin' (transactin') is

,ero# o yo a'ree+ E-plain# (1. mar/s)

onopolists pricing is said to be ine?cient because the price of the

product is set above the marginal cost of product. 4n one hand6 price ismeasure of marginal value 'hich represents the ma=imum a consumer

is 'illing to pay to acuire his last incremental unit.

4n the other hand6 marginal cost means the ma=imum value of the

opportunity forgone to produce the last incremental unit. 5f6 at the

margin6 'hat a consumer is 'illing to pay e=ceeds the cost of

production6 then society 'ill gain if the marginal unit is produced. Since

a monopolist stops production 'hen marginal value is still greater than

marginal cost6 this implies that some potential gains 'ill not be

1#


17/57

reali,ed. 0hus6 ine?ciency results.

o'ever6 if transaction costs are ,ero6 then in attempting to ma=imi,e

'ealth by e=tracting consumers< surplus6 a monopolist 'ill adopt ascheme of perfect price discrimination. 5n this case the marginal value

'ill become the monopolist


18/57

lar'e bo-es of lan&ry &eter'ent are fre5ently o3ere& at

lower prices once than smaller bo-es# %t is sometimes ar'e&

that this pricin' arran'ement is a form of price &iscrimination#

(a) *hat is price &iscrimination+ (

mar/s)

2rice discrimination is dened as for the same good6 di>erent

customers are charged di>erent prices6 including di>erent price options

or price structures6 e.g. all!or!nothing pricing or packaging sales.

(b) 9i:en an e-planation of the abo:e &iscont practice other

than price

&iscrimination# (; mar/s)

0he above discount practice is not price discrimination. 5t is because

the services concerned for large bo=es and smaller bo=es are di>erent.

As the uantities are di>erent6 there 'ill be di>erences in the cost of

e=change. Besides6 the costs of packaging the goods are also di>erent.

oreover6 the costs of keeping inventories also di>er. Since the per unit

costs of the above processes are lo'er for large bo=es6 the lo'er price

o>ers are not price discrimination.

1!!$ "# erent customers have di>erent

information costs about prices6 in the search for bargains or negotiation

for prices they may end up paying di>erent prices for the same good.or buyers 'ith higher information costs6 this implies that their time

costs are high in searching for better bargains. ence6 in order to save

their time for more valuable use6 they 'ill spend less time in nding for

better o>ers. 0hus6 they 'ill tend to end up paying higher prices for the

same good.

or buyers 'ith lo'er information costs6 as their time does not much

valuable alternative uses6 they can a>ord more search for cheaper

o>ers. ence6 they 'ill tend to end up paying lo'er prices for the same

good.oreover6 there is no systematic relation established to date

'hich reveals that a buyer 'ith higher information cost 'ith have a

lo'er elasticity of demand.

1!!; "# $

o the followin' cases constitte price &iscrimination+ E-plain#

(a) >on' &ri:ers are char'e& more for motor insrance than

are ol&er &ri:ers#

($

mar/s)

0his is not price discrimination because young people are usually more

risky drivers6 thus there is a greater possibility of tra?c accidents. As

more accidents means greater compensation made by the insurance

companies6 this means that the insurance companies incur higher costof providing insurance to the young drivers.

(b) Stan&by fares of airlines are mch lower than re'lar fares#

($ mar/s)

0his is not price discrimination because the airlines do not provide the

same services to these t'o groups of buyers. 0hose purchasing

standby ticket!holders need to go the airport and 'ait for their turns to

go on board. 0hey spend more time to 'ait than those buying regular!

19


20/57

fare air tickets. 4nce the air tickets are booked6 those paying regular

fares are sure of getting on board at the time of the Hight. 5n other

'ords6 those paying standby fares purchase service 'hich is not as

good as those paying regular fares. 0hus this is not pricediscrimination.

1!!= "# erent marginal costs6 or 'hen it is

not e=actly produced by the same producer6 but sold at di>erent

%"


21/57

prices6 it is not price discrimination.

(b) %t has been pointe& ot (correctly) that the intro&ction of

the si'ni?cantly cheaper Asian e&ition is &e to the fact that

copyri'hts are more costly to enforce in Asia than in the

U#S# @ow will this hi'her cost of enforcin' copyri'hts a3ect

the price elasticity of &eman& for te-tboo/s+ E-plain#

(= mar/s)

As the ma-or determinant of elasticity of demand for te=tbooks 'ith

copyrights is the number of close substitutes available6 illegal printing

of a book or photocopying of a book produces close substitutes for the

te=tbook 'ith copyright protection.

5f the cost of enforcing copyrights is high6 more illegal printing or

photocopying of a book 'ill be done. 5n this case6 as demand for

te=tbooks 'ith copyrights 'ill become more elastic as a result of more

close substitutes available.

ence6 in order to compete 'ith illegal printing or photocopying 'ith

E.S. books6 lo' prices are set for Asian editions.

1!!! "# ;

Airline companies often o:erboo/ i'ht they accept more

reser:ations for a i'ht than there are a:ailable seats on the

airplane# This sometimes reslts in a sitation where too manypassen'ers arri:e at the airport for the same i'ht#

%n the Unite& States8 if this occrs8 the airline mst ma/e a

pblic annoncement that the i'ht is o:erboo/e& an& that it

is necessary for some passen'ers to :olnteer to chan'e their

reser:ations for later i'hts# Compensation will be 'i:en to

any :olnteers sally money or a copon for an a&&itional

free i'ht at a later &ate# %f this &oes not reslt in eno'h

:olnteers8 then the airline shol& ma/e another call for

%1


22/57

willin' passen'ers an& annonce an increase in the

compensation le:el#

A prominent politician critici,e& this scheme by sayin'8 4%t

hrts the interests of the lowincome passen'ers becase8

more often than not8 wealthy passen'ers will 'et the seats#6

(a) *ho will 'ain from this o:erboo/in' scheme8 the low

income or the wealthy passen'ers+

(< mar/s)

0he lo'!income passengers6 because the 'ealthy passengers tend to

have a higher time cost and it 'ould cost them more to 'ait. 0he lo'!

income passengers 'ho prefer to 'ait for another Hight are6 in general6

compensated by a re'ard more than their 'aiting costs.

(b) *ill the wealthy passen'ers ten& to 'et seats more often

than the lowincome passen'ers+ *hy or why not+

(; mar/s)

Jes. Again because they have a higher time cost.

0... "# ;

eptable stores with bi' names (i#e# anchor stores) often pay

consi&erably lower rentals per s5are foot than other stores in

a lar'e shoppin' mall# %s this price &iscrimination+ E-plain#

oes a lower rental from an anchor store reect a lowerincome recei:e& by the lan&lor&+ (1.

mar/s)

0his is not a case of price discrimination. 5n vie' of the landlord6 the

cost per suare foot incurred in renting to large shopping mall is lo'er.

or the same area6 higher transaction costs 'ill be incurred if renting to

other stores. Costs include advertising6 bargaining as 'ell as legal

charges. 0hus6 since landlord incurs lo'er transaction costs in renting

%%


23/57

to reputable stores6 charging them lo'er rent per suare foot is not

price discrimination.

Charging lo'er rental from anchor stores does not reHect a lo'er rentalincome received by landlord. Since the anchor stores 'ill attract more

people to the shopping mall6 the other non!anchor stores in the mall

'ill get more business. 0hus6 more people 'ill be attracted to open

stores in the mall. As a result the landlord can ask for higher rental

from other non!anchor stores. 0his may result in a higher income

received by the landlord. As the higher rent for the non!anchor stores

'ill fully or even more than fully compensate the landlorderent income elasticities of demand than 'ith

the price elasticities of demand.

An alternative answer is not price discrimination. The reason is that

customers are not separated, they can decide by themselves on which

day they would go to see movies and that everyone is charged the

same price on Tuesdays, and that tickets on diferent weekdays are

diferent goods, etc.

%/


24/57

0..0 "# erent passengers are paying di>erent

fares6 the case is price discrimination. o'ever6 if 'ith the same

vacancy each and every passenger is paying the same fares6 but 'ith

di>erent vacancy rates passengers pays di>erent fares6 a higher fare

for lo'er vacancy6 the case is not price discrimination ! it is peak-load

pricing.

2rice discrimination arising from vacancy6 as the seller is eager to ll

the vacant seats by charging di>erent prices for di>erent customers6

%:


26/57

may not entail di>erent price elasticities of demand.

0..< "#

*hat is perfect price &iscrimination+ Col& a wealth

ma-imi,in' monopolist pro&ce p to the point where mar'inal

cost e5als mar'inal se :ale if the consmer srpls of each

consme is not flly e-tracte&+ E-plain# (=

mar/s)

2erfect price discrimination means each and every buyererent all!or!nothing price6 or pays according to a di>erent price

schedule.

0here are several 'ays in practicing of perfect price discrimination.

irst of all6 'hen transaction costs are negligible6 sellers may charge

customers along their EM curves. Also6 products can be sold on an all!

or!nothing pricing. 5n addition6 monopolist may restrict the sale of a

good 'ith a membership system. 5n other 'ords6 the collection of

membership can help e=tracting consumer surplus.

)e*ertheless+ a &ealth maximi,ing monopolist could produce to the point &here marginal

cost equals marginal use *alue if the consumer surplus of each consumer is not fully

extracted.

%#


27/57

Consider a case at &hich the monopolist set a ne& uniform price or the price is regulated

by the go*ernment to be not higher than -'+ the hori,ontal price line is ust the ne& /

cur*e for the firm. As a &ealth"maximi,ing firm+ the monopolists &ill produce at a point

&here / equals the /C. At the last unit+ the output le*el &ill satisfy the condition at

&hich /1 3 /C. At a result+ consumers4 surplus of each consumer is not fully

extracted.

0..< "# 2

@an' Shan is a famos montain attractin' many :isitors

e:ery year# early all :isitors reach the pea/ of the montain

by ri&in' cable cars# rin' wee/&ays a fee of MB =. per

person is char'e rin' holi&ays the crow& is so lar'e that it

sally ta/es se:eral hors waitin' in line before a :isitor can

'et on the cable car# Un&er the operation of the local

'o:ernment8 the followin' &alfee scheme is a&opte& on

holi&ays# 7or :isitors willin' to pay 10. per person (MB $.

more)8 they can 'o to a separate waitin' room with a mch

shorter 5ee# All :isitors will reach the pea/ the same &ay8

bt becase the capacity of cable cars is ?-e&8 those payin'

the lower fee of MB =. will be pshe& frther bac/ to wait

lon'er# There has been no riot# Assme all :isitors /new abot

this &alfee an& perfectly anticipate& their waitin' time in

a&:ance#

(a) *ill the total re:ene recei:e& by the operator be hi'her or

lower with the &alfee scheme+ E-plain#($ mar/s)

0he total revenue 'ill be higher. Since (or on the assumption$ the

marginal 'aiter pays 7B 8" and his 'aiting time is unchanged6 the

total number of visitors also remains unchanged. 0he total revenue

rises because some intramarginal 'aiters pay the higher fee of 7B

1%".

(c) %s the &alfee scheme a case of price &iscrimination+

%


28/57

E-plain# ( mar/s)

0he dual!fee scheme is not a case of price discrimination because 'ith

di>erent 'aiting times the products are not the same.

0..2 "# 2

%n a store where cstomers bar'ain for lower prices8 some

cstomers en& p payin' hi'her prices than others for the

same 'oo&s# %s this price &iscrimination+ %f not8 why not+ %f

yes8 &oes this reect &i3erent price elasticities of &eman&+ %f

it &oes not reect &i3erent price elasticities of &eman&8 what

e-plains why &i3erent cstomers pay &i3erent prices+

(1. mar/s)

5t is price discrimination if the hours of operation are eually busy 'hen

the same goods are sold. 0he price elasticities of demand may or may

not be the same among customers6 and the ones paying higher pricesmay not be the ones 'ho have lo'er price elasticities of demand. 0his

price discrimination occurs because information costs6 or bargaining

abilities6 di>er among di>erent customers6 'ith those having higher

information costs or higher search costs tend to pay higher prices.

0..; "# s and landings 'ill reduce this divergence.

C. So long as the market value of nearby property continues to rise 'ith

divergence bet'een private and social costs declines.

D. 0here is no divergence bet'een private and social costs as long as the

market value of nearby property rises.

/8


39/57

(":!%9$

/9. 0he Coase 0heorem states that

A. if property rights are clearly dened6 the divergence bet'een private and

social costs 'ill be eliminated.

B. if property rights are clearly dened and the transaction cost is ,ero6 the

divergence bet'een private and social costs 'ill be eliminated.

C. if all costs of transaction are ,ero6 there may be a divergence bet'een

private and social costs.

D. if property rights are not clearly dened6 there 'ill al'ays be a divergence

bet'een private and social costs. (":!

/"$

3". Both elephants and co's are animals 'hich have commercial value. o'ever6

elephants face the threat of e=tinction 'hile co's do not. 0his is because

A. the price of elephants tusks6 compounded by international prohibition of the

trade6 is not high enough.

B. elephants are usually 'ild animals 'hile co's are raised by people.

C. being large in si,e6 elephants are easy targets for hunters.

D. All of the above. ("#!"9$

31. 0he presence of transaction costs implies that

A. some resources 'ill be allocated ine?ciently.

B. institution 'ill emerge to organi,e resource allocation.

C. there 'ill be no competition.

D. there 'ill be no euilibrium. ("#!%:$

3%. &hich of the follo'ing statements about transaction costs is correct+

A. 0ransaction Costs are not measurable because it is not possible measure

transaction costs in dollar and cents.

B. 5t is not necessary to measure transaction costs because they are not

observable.

C. 0o measure transaction costs only a ranking of theses costs under di>erent

situations is reuired.

D. &hether or not transaction costs are measurable has nothing to do 'ith

/9


40/57

deriving testable implications. ("#!%#$

3/. 0'o ad-acent houses have trees e=tending into each other


41/57

D. 6here is necessarily a di*ergence bet&een pri*ate and social costs. 0!"#0$

MC Answers on The Problem of Social Cost

A B C C B B

A C C A A C B B

A B A C C A C

A C C C B

B A A B

The Problem of Social Cost

1!!! "# !

%mports of 'oo&s sch as cameras8 compters8 :i&eo tapes8an& GCs that &o not pass tho'h athori,e& @on' Don'

&istribtors are /nown as parallel imports# Parallel imports are

not pirate& 'oo&s# The 5alities of athori,e& imports an&

parallel imports are the same# *hile the @on' Don'

'o:ernment has lon' prohibite& the import an& the sale of

pirate& 'oo&s8 it has only recently passe& re'lations which

ma/e the parallel imports of :i&eo tapes an& GCs ille'al#

(a) Assmin' the new re'lations are strictly enforce&8 who

31


42/57

'ains an& who lose+

(;

mar/s)

Authori,ed ong ong distributors 'ill gain6 at the e=pense ofcustomers and unauthori,ed distributors. 0he producers and the ong

ong government (ta= collecting agent$6 ho'ever6 may gain or lose. 5f

pirated goods are ignored and if the producers 'ill not be able to

charge higher prices under the ne' regulations6 the producers 'ill lose.

0he government


43/57

or&er to ma-imi,e wealth8 the tnnel company simply char'es

a toll per car to ma-imi,e total re:ene#

(b) Some economists ar'e that if the cost of ser:in' an e-tra

car is ,ero8 as it will be if the tnnel has no trac

con'estion8 then8 to ma-imi,e social bene?t8 no toll shol&

be char'e The conter ar'ment to this is that if no toll is

char'es8 no pri:ate enterprise will bil& the tnnel# ow the

tnnel is alrea&y bilt8 an& sn/ cost is sn/# *ill social

bene?t increase if the 'o:ernment prchases the tnnel an&

lets all cars se it free of char'e+ (o mst e-plain yor choiceK otherwise yo will

recei:e no mar/ at all# (= mar/s)

0his statement is A)S*.

5t is because as long as payments can be collected from the users and

the non!paying group can be e=cluded6 a public good can be produced

by a private enterprise.

or e=ample6 a movie sho'n in a theatre is a public good because it is

amenable to concurrent consumption by many individuals6 yet this

sho' privately produced because payments can be collected. 5n this

case only the paying consumers can obtain the service can obtain the

service and the non!paying public are being e=cluded.

1!!$ "# =

Compact &iscs of poplar son's are now bein' repro&ce& in a

massi:e scale in China# This repro&ction is ille'al8 an& therepro&ce& &iscs are sol& in the mar/et at si'ni?cantly lower

prices than the ori'inal &iscs#

7rom the stan&point of ma-imi,in' social 'ains8 shol& the

ille'al practice of repro&cin' &iscs be ?rmly sppresse& so

that only the hi'herprice& ori'inal &iscs can be fon& on the

mar/et+ E-plain# (1. mar/s)

&ith the reproduction of compact discs6 this 'ill result in lo'er prices

:%


53/57

'hich come closer to the marginal cost of production. &ith the increase

in consumption6 as long as the marginal use value is positive6 this 'ill

lead to a rise in total use value. oreover6 such a fall in prices 'ill bring

the marginal use value of consumers closer to the marginal cost.ence6 from the standpoint of ma=imi,ing social gains6 the illegal

practice of reproducing discs should not be rmly suppressed.

o'ever6 if the illegal practice of reproducing discs are not be rmly

suppressed6 the patent rights of the original discs 'ill not be protected.

5f the resulting income received by the original producers becomes too

lo'6 the discs may not have been produced at all. As the total use

value of the potential users is higher than the cost of producing the

discs6 there 'ill be a fall in social gains if the discs are not produced.

ence6 from the standpoint of ma=imi,ing social gains6 'hether the

illegal practice of reproducing discs should or should not be rmly

suppressed depends on 'hether such illegal practice 'ill end the

production of the original discs.

1!!= "# ;

A&:ertisements pro:i&e correct information as well as false

informationK a&:ertisements may be borin' or they may be

entertainin'# All a&:ertisements are costly to place#

(a) Commercial tele:ision pro'rammes are spporte& by

a&:ertisin' sponsors an&8 e-pect for cable TG8 the :iewers&o not ha:e to pay any fees# %s it really tre that :iewers &o

not ha:e to pay any cost at all+ E-plain# (;

mar/s)

By cost6 'e have to consider the full cost borne by vie'ers in 'atching

0M commercials. Since full cost consists of monetary cost as 'ell as

non!monetary cost6 though vie'ers do not need to pay monetary cost6

they pay non!monetary cost in terms of the amount of time spent on

'atching 0M commercials. As the amount of time spent can be used in

:/


54/57


55/57

become much higher than if they are paid by employers. 5t is because

there are so many 'orkers in the labour market6 if each of them

advertises his serviceL there 'ill be so many advertisements that the

total cost 'ill be e=tremely high. urthermore6 each buyer 'ill alsohave to spend a lot of time reading all these advertisements for

suitable 'orkers.

As the number of buyers are typically fe'er than sellers6

advertisements put up by them can become fe'er and this in turn

saves transaction costs. oreover6 sellers can nd it easier to search

for the information suitable for them.

So6 to conclude6 in order to save searching and information costs6 it is

the buyers of labour services 'ho put up the advertisements instead of

the sellers of labour services.

0..< "# ;

The Chinese 'o:ernment sbsi&i,es the trainin' of promisin'

athletes# *hen some of the athletes become sports stars8 sch

as winners of Flympic 'ol& me&als8 the 'o:ernment is entitle&to a share of the income (incl&in' a&:ertisin' income) earne&

by the star athletes thro'h prearran'e& contracts between

the 'o:ernment an& the athletes# The Chinese 'o:ernment has

been losin' money in this sbsi&i,ation bsiness#

Fn the other han&8 in the Unite& States8 pri:ate professional

trainin' centres (sch as those for professional tennis players)

e-ist an& they are ma/in' money8 by char'in' relati:ely low

trainin' fees pls contracte& shares of the athletes6 ftre

::


56/57

incomes from the sport#

(a) *hy &oes the Chinese 'o:ernment lose money in trainin'

athletes+ Fn what economic 'ron& col& this sbsi&i,ation

be Isti?e&+ (< mar/s)

0he government loses money in training athletes because she trains

too many of them6 including the less talented athletes as 'ell as those

speciali,ing in sports that have little or no commercial value. 0he

presence of e=ternal e>ects6 such as national pride of glory6 may yield

values to citi,ens at large6 as most if not all Chinese in some measure

en-oy a greater number of gold medals 'on in the 4lympic ames. 5t

'ould be highly di?cult to collect payments for this type of e=ternal

benecial e>ects from all those en-oying the results of the training.

(0ransaction Costs may be mentioned here.$ Does national pride 'orth

something to the citi,ens+ 4f course. But since payments are not

enforced there is no 'ay 'e can assess actually ho' much the citi,ens

'ould be 'illing to pay.

(b) Fn a :olntary trainin' basis (altho'h sometimes n&er

pressre)8 Chinese athletes to&ay ha:e won far more 'ol&

me&als in the Flympic 9ames than the earlier perio& when

the trainin' of promisin' athletes was complsory# *hy+

($

mar/s)

Because monetary re'ards are far higher today (direct monetary

re'ards from state and local governments6 as 'ell as from private

donors6 plus indirect commercial re'ards$6 talented athletes voluntarily

come for'ard 'ithout much forcing6 and because of the higher re'ardsthey train themselves harder.

(c) o yo anticipate the trainin' of professional athletes be

con&cte& thro'h pri:ate fn&in' in China in the ftre+ %f

so8 which professional sports are most li/ely to be so

:#


57/57

fn&e&+ E-plain# (< mar/s)

Jes6 but it is mainly in individual sports (not team sports$ 'ith high

commercial values. 0here are tennis6 golf6 gure skating6 diving evensome track and eld events spectators love to 'atch or that are good

to advertisement purposes.

E

Documents

AL Econ Micro by Topic