Thursday, January 12, 2017

2012 Multiple Choice (Market Failure) Externalities

2012 Multiple Choice (Market Failure) Externalities
Market Failure (externalities) cheat sheet here.


Answer - (B) Subsidies the producer

Understand that the Government really can only do two things: tax or subsidies.
If it a positive externality, we want more of it....
So society subsidises the production of the good


Answer - 59 (D) 
Answer - 60 (B)




2012 Multiple Choice - (Perfect Competition)

2012 Multiple Choice - (Perfect Competition)

I want to believe in Perfect Competition.



Answer - (C) I and IV

Understand that the firm above/below is making profits.
P > ATC = Positive Economic Profits
In the Long-Run Firms enter the industry hunting for profits.
SSSHHHH... I'm hunting for Pwofits.




Answer - (D) Perfectly Competitive Q3

Recognise that the perfectly competitive's firms Total Revenue Curve is upward sloping
and continuous as they can sell all they want at the market price.
Understand that at the quantity where TC is furthest away from TR on the graph is Profit max.



Answer - (E) tastes for luxury goods

WTF!!!!

(A) years of schooling (YES) different wages due to different human capital
(B) Occupations (YES) Obviously the doctor receives more than the bus driver
(C) Marginal Product (S) of workers (YES) workers can be paid different wages based on MP,, at some point someone gets paid a salary of zero, as they aren't hired... 
Yes,, that is a weak explanation..
(D) Marginal Revenue Products (Yes) possibly different firms, different salaries, as the MRP is MP * P (price of the good) so a higher price could lead to larger wages as firms try and hire enough labor to  meet the quantity demanded.
(E) Tastes for Luxury Goods (NO) Someone's desire for luxury goods does not change the wages between workers.



2012 Multiple Choice - (Gini Coefficient/ Progressive Taxation)

2012 Multiple Choice - (Gini Coefficient/ Progressive Taxation)




Welker - Video


Answer - (B) More progressive income tax

Understand that incomes are earned,, distribution is what the government does so in actuality wealth is distributed not incomes.

If someone steals from me their wealth might have increased 
but to call that income is offensive.

Answer - (E)

This a simple recognition problem. Understand that they don't want you to calculate the percentage differences between the before/after incomes.

These gini coefficient and progressive tax questions are mostly recognition questions.

I hate these questions...

2012 Multiple Choice Government Intervention (Price floors, ceilings, indirect tax)

2012 Multiple Choice Government Intervention (Price floors, ceilings, indirect tax)
Government Intervention cheat sheet here.



Answer - (B) A shortage of 6 billion gallons

Understand, that the biggest problems with these problems is knowing a ceiling from a floor.
say it,,,,,
Floors are high
Ceilings are low
say it again,,,,
Floors are high
Ceilings are low 

You might be tempted to say that the shortage is 4 billion gallons but understand that at the new (government controlled) price the Qd increases to 12b.
12b(Qd) - 6b(Qs) = 6b actually supplied


Answer - (D) Decrease   Decrease



Answer - (B) create a shortage of flashlights

If demand increases but supply does not, then shortages occur.
Producers will only supply more of a good if the price of the good increases


The NET price is the price received with the taxes taken out 
(amount the seller gets to put in his pocket)

18) Answer (D)
19) Answer (D)



Government Intervention Cheat Sheet Updated (01/12/2017)

Government Intervention Cheat Sheet Updated (01/12/2017)
Price Ceilings
Price Floors
Indirect Tax/Subsidy
Tariffs



2012 Oligopoly Multiple Choice

2012 Oligopoly Multiple Choice
Oligopoly Cheat Sheet here.

Answer - (A) Oligopoly

Understand that the word interdependence = oligopoly 


Answer - (C) A few competing sellers with similar products and high barriers to entry.

Recognise the definition of oligopoly?


Answer - (B) Both companies have an incentive to reduce production by 10%.

For the love of Pete, make a chart.
answer the chart.

Now, you know what they should do depending on the other (firms) actions,

but if they don't cooperate they don't know the other (firms) actions,

so, they don't cooperate.

Let us look at the answers 1 by 1


(A) Neither Company has a dominate strategy.
Actually both companies have dominate strategies UB (-10%) & UA (-20%)
Dominate Strategy - Best choice no matter the choice of the other participant. Doing the same thing no matter what the other firm does, is a dominate strategy.

Answer - (B) Both companies have an incentive to reduce production by 10%.
(B) is answered in the answer to (C), below


(C) Both companies have an incentive to reduce production by 20%
On first glance, this seems appropriate.
If they are both choosing to reduce by 20% then the payoffs would be $150 each, not bad.
but
this would only be true if they both new the information in the matrix
they don't
The problem says, based on the information, and assuming no cooperation,
assuming no cooperation implies they don't have information about the payoff matrix
so, if they don't know the information in the payoff matrix
they are going to choose the quadrant where they make the most money.

They do have the incentive of -20%, if they are cooperating
but they aren't cooperating.
The greedy principle....

Without knowing the information in the payoff matrix, they each choose the highest payoff
why not????

Because they both made the rational choice, highest payoff & didn't cooperate

they end up, making the least amount on the board.

(B) If the question had asked what the payoff would have been with no cooperation it
would have been 
UA chooses -10% and receives  $100
UB chooses -10% and receives  $100
This was the question and is the answer to (B)

(D) Only UA has an incentive to reduce production by 20%
We can look at the graph directly above,, and see that with the greedy principle, not knowing the payoff matrix, and not cooperating that UA would choose the highest daily payoff
of $250 which is in the -10% quadrant

(E) Only UA has an incentive to reduce production by 20%
Same reason as (D) above but with UB
We can look at the graph directly above,, and see that with the greedy principle, not knowing the payoff matrix, and not cooperating that UB would choose the highest daily payoff
of $250 which is in the -10% quadrant

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