1) Consider the following Table:
Q
p
TC
0
100
180
1
90
190
2
80
200
3
70
210
4
60
220
5
50
230
6
40
240
7
30
250
8
20
260
9
10
270
10
0
280
which contains the demand schedule for a service and the long-run total cost TC of providing it (the cost of producing the quantity zero is a quasi-fixed cost).
In order to answer the following questions, you may need to calculate variables like ATC, MC, R, etc. Copy and paste the preceding table in the Answers section below, including calculations of the values of all the variables that you will find relevant.
What quantity will be socially efficient to produce in this industry? How many firms should be in the industry in order to have the efficient quantity produced? Why? What will be the industry’s profit if the efficient quantity is to be sold? (Hint: ATC may help to explain this).
What quantity would you expect that it will be produced in this industry and at what price will be sold if the government does not intervene in order to modify the market outcme? Will this outcome be efficient? What will be the total industry’s profit and the deadweight loss, if any?
Would you expect that the government would intervene in order to modify the market’s outcome? What will be the nature and goal of this intervention? What quantity will be produce and at what price will be sold, assuming that the executive power does not have congresional support to collect additional taxes? Could the government opt for a more efficient approach if it can use non-distortive taxes (i.e.: lump-sum taxes).
Illustrate parts (b), (c) and (d) with a relevant graph.
2) Consider the claim that the market interaction of individually rational agents leads to an outcome that is socially rational. Address the following questions:
In what sense is the above claim true? Explain what means that agents are individually rational and that the market outcome is socially rational as part of your answer.
Identify at least two essential conditions that a market must satisfy for the claim to be true. (i.e.: in the context of the models that we examined in this course, the conditions must be necessary and sufficient for the claim to be true).
Explain why the claim should be true when these two conditions are satisfied.
Explain why the claim would no longer be true for markets that do not satisfy these two conditions, separately focusing on each one of the cases in which the claim is not true.
For those cases in which the claim is not true, describe government interventions that may help the market outcome to become socially rational in some sense.