曼昆微观经济学习题

1. Describe some of the trade-offs faced by each of the following:

a. a family deciding whether to buy a new car b. a member of Congress deciding how much to spend on national parks

c. a company president deciding whether to open a new factory

d. a professor deciding how much to prepare for class

e. a recent college graduate deciding whether to go to graduate school

2. You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and forgone wages) are measured in

dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs?

3. You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing? Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in this case? Explain.

4. You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now?

5. The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development? 6. The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he or she receives in Social Security benefits is typically reduced. a. How does the provision of Social Security

affect people‘s incentive to save while working?

b. How does the reduction in benefits associated with higher earnings affect people‘s incentive to work past age 65?

7. A 1996 bill reforming the federal government‘s antipoverty programs limited many welfare recipients to only two years of benefits. a. How does this change affect the incentives for working?

b. How might this change represent a trade-off between equality and efficiency?

8. Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all the cooking and you did all the cleaning, would your chores take you more or less time than if you divided each task evenly? Give a similar example of how specialization and trade can make two countries both better off.

9. Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.

a. regulating cable TV prices

b. providing some poor people with vouchers that can be used to buy food

c. prohibiting smoking in public places d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies

e. imposing higher personal income tax rates on people with higher incomes f. instituting laws against driving while intoxicated

10. Discuss each of the following statements from the standpoints of equality and efficiency. a. ―Everyone in society should be guaranteed the best healthcare possible.‖

b. ―When workers are laid off, they should be able to collect unemployment benefits until they find a new job.‖

11. In what ways is your standard of living different

from that of your parents or grandparents when they were your age? Why have these changes occurred?

12. Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?

13. In 2010, President Barack Obama and Congress enacted a healthcare reform bill in the United States. Two goals of the bill were to provide more Americans with health insurance (via subsidies for lower-income households financed by taxes on higher-income households) and to reduce the cost of healthcare (via various reforms in how healthcare is provided). a. How do these goals relate to equality and efficiency?

b. How might healthcare reform increase productivity in the United States?

c. How might healthcare reform decrease productivity in the United States?

14. During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort; to make up this difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an ―inflation tax.‖ Who do you think is being ―taxed‖ when more money is printed? Why?

15. Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation. To make an intelligent decision, what would you need to know about inflation, unemployment, and the trade-off between them?

16. A policymaker is deciding how to finance the construction of a new airport. He can either pay for it by increasing citizens‘ taxes or by printing more money. What are some of the short-run and long-run consequences of each option?

1. Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities. a. Selena pays a storekeeper $1 for a quart of milk.

b. Stuart earns $4.50 per hour working at a fastfood restaurant.

c. Shanna spends $30 to get a haircut. d. Sally earns $10,000 from her 10 percent ownership of Acme Industrial.

2. Imagine a society that produces military goods and consumer goods, which we‘ll call ―guns‖ and ―butter.‖

a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape.

b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.

c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose.

d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger ―peace dividend,‖ measured by the increase in butter production? Explain.

3. The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society‘s trade-off between two ―goods‖—a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers

develop a new way of producing electricity that emits fewer pollutants.

4. An economy consists of three workers: Larry, Moe, and Curly. Each works ten hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can either mow two lawns or wash one car. a. Calculate how much of each service is produced under the following circumstances, which we label A, B, C, and D: ? All three spend all their time mowing lawns. (A)

? All three spend all their time washing cars. (B)

? All three spend half their time on each activity. (C)

? Larry spends half his time on each activity, while Moe only washes cars and Curly only mows lawns. (D)

b. Graph the production possibilities frontier for this economy. Using your answers to part (a), identify points A, B, C, and D on your graph.

c. Explain why the production possibilities frontier has the shape it does.

d. Are any of the allocations calculated in part (a) inefficient? Explain.

5. Classify the following topics as relating to microeconomics or macroeconomics. a. a family‘s decision about how much income to save

b. the effect of government regulations on auto emissions

c. the impact of higher national saving on economic growth

d. a firm‘s decision about how many workers to hire

e. the relationship between the inflation rate and changes in the quantity of money 6. Classify each of the following statements as positive or normative. Explain.

a. Society faces a short-run trade-off between

with respect to the price of good Y: 2 Would an increase in income and a decrease in the price of good Y unambiguously decrease the demand for good X? Why or why not? 8. Maria has decided always to spend one-third of her income on clothing.

a. What is her income elasticity of clothing demand?

b. What is her price elasticity of clothing demand?

c. If Maria‘s tastes change and she decides to spend only one-fourth of her income on clothing, how does her demand curve change? What is her income elasticity and price elasticity now?

9. The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase: ―There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.‖ a. Use these data to estimate the price elasticity of demand for subway rides.

b. According to your estimate, what happens to the Transit Authority‘s revenue when the fare rises?

c. Why might your estimate of the elasticity be unreliable?

10. Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, ―I‘d like 10 gallons of gas.‖ Jerry says, ―I‘d like $10 worth of gas.‖ What is each driver‘s price elasticity of demand? 11. Consider public policy aimed at smoking. a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $2 and the government

wants to reduce smoking by

20 percent, by how much should it increase the price?

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now

or five years from now?

c. Studies also find that teenagers have a higher

price elasticity than do adults. Why might this be true?

12. You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admission? Explain.

13. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it was).

a. What happens to the equilibrium price and quantity in each market?

b. Which product experiences a larger change in price?

c. Which product experiences a larger change in quantity?

d. What happens to total consumer spending on each product?

14. Several years ago, flooding along the Missouri and the Mississippi rivers destroyed thousands of acres of wheat.

a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose crops were not destroyed benefited from the floods. Why?

b. What information would you need about the market for wheat to assess whether farmers as a group were hurt or helped by the floods?

15. Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive.

1. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer

people attend classical music concerts?

2. The government has decided that the free-market price of cheese is too low.

a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-

and-demand diagram to show the

effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.

c. In response to farmers‘ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

3. A recent study found that the demand and supply

schedules for Frisbees are as follows:

Price per Quantity Quantity Frisbee Demanded Supplied

$11 1 million Frisbees 15 million Frisbees 10 2 12 9 4 9 8 6 6 7 8 3 6 10 1

a. What are the equilibrium price and quantity of Frisbees?

b. Frisbee manufacturers persuade the government that Frisbee production improves scientists‘ understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?

c. Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor.

What is the new market price? How many Frisbees are sold?

4. Suppose the federal government requires beer drinkers to pay a $2 tax on each case of beer purchased. (In fact, both the federal and state governments impose beer taxes of some sort.) a. Draw a supply-and-demand diagram of the market for beer without the tax. Show the price paid by consumers, the price received by producers, and the quantity of beer sold. What is the difference between the price paid by consumers and the price received by producers?

b. Now draw a supply-and-demand diagram for the beer market with the tax. Show the price paid by consumers, the price received by producers, and the quantity of beer sold. What is the difference between the price paid by consumers and the price received by producers? Has the quantity of beer sold increased or decreased?

5. A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers. Would this accomplish the senator‘s goal? Explain.

6. If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.

7. Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline sold. a. Should they impose this tax on producers or consumers? Explain carefully using a supply-and-demand diagram.

b. If the demand for gasoline were more elastic, would this tax be more effective or less effective in reducing the quantity of gasoline consumed? Explain with both words and a diagram.

c. Are consumers of gasoline helped or hurt by

this tax? Why?

d. Are workers in the oil industry helped or hurt by this tax? Why?

8. A case study in this chapter discusses the federal minimum-wage law.

a. Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor. Using a supplyand- demand diagram of the market for unskilled labor, show the market wage, the number of workers who are employed, and the number of workers who are unemployed. Also show the total wage payments to unskilled workers.

b. Now suppose the secretary of labor proposes an increase in the minimum wage. What effect would this increase have on employment? Does the change in employment

depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

c. What effect would this increase in the minimum wage have on unemployment? Does the change in unemployment depend on the elasticity of demand, the elasticity of supply, both elasticities, or neither?

d. If the demand for unskilled labor were inelastic, would the proposed increase in the minimum wage raise or lower total wage payments to unskilled workers? Would your answer change if the demand for unskilled labor were elastic?

9. The U.S. government administers two programs that affect the market for cigarettes. Media campaigns and labeling requirements are aimed at making the public aware of the dangers of cigarette smoking. At the same time, the Department of Agriculture maintains a price-support program for tobacco farmers, which raises the price of tobacco above the equilibrium price.

a. How do these two programs affect cigarette consumption? Use a graph of the cigarette market in your answer.

Given your analysis, why might the use of care be viewed as ―excessive‖?

d. What sort of policies might prevent this excessive use?

1. The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve.

a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any deadweight loss? Explain.

b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer surplus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?

c. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labeled areas in your graph.

2. Evaluate the following two statements. Do you agree? Why or why not?

a. ―A tax that has no deadweight loss cannot raise any revenue for the government.‖ b. ―A tax that raises no revenue for the government cannot have any deadweight loss.‖

3. Consider the market for rubber bands. a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answer.

b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between

consumers and producers? Contrast your answer with your answer to part (a).

4. Suppose that the government imposes a tax on heating oil.

a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain. b. Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain. 5. After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a ―good‖ way to raise revenue? In what sense is it not a ―good‖ way to raise revenue?

6. Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollowtipped bullets.

a. Do you expect that this tax would raise much revenue? Why or why not?

b. Even if the tax would raise no revenue, why might Senator Moynihan have proposed it?

7. The government places a tax on the purchase of socks.

a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue.

b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? Explain.

c. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.

8. Suppose the government currently raises $100 million through a 1-cent tax on widgets, and

another $100 million through a 10-cent tax on gadgets. If the government doubled the tax rate on widgets and eliminated the tax on gadgets, would it raise more tax revenue than it does today, less tax revenue, or the same amount? Explain.

9. This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.

10. Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day. a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900. Calculate the amount of revenue this tax raises for Smalltown and the deadweight loss of the tax. (Hint: The area of a triangle is 1?2 3 base 3 height.)

b. The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms rented falls to 800. Calculate tax revenue and deadweight loss with this larger tax. Do they double, more than double, or less than double? Explain.

11. Suppose that a market is described by the following supply and demand equations:

QS 5 2P QD 5 300 – P

a. Solve for the equilibrium price and the equilibrium quantity.

b. Suppose that a tax of T is placed on buyers, so the new demand equation is

QD 5 300 – (P 1 T).

Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

c. Tax revenue is T 3 Q. Use your answer to

part (b) to solve for tax revenue as a function of T. Graph this relationship for T between 0 and 300.

d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is 1?2 3 base 3 height, solve for deadweight loss as a function of T. Graph this relationship for T between 0 and 300. (Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.) e. The government now levies a tax on this good of $200 per unit. Is this a good policy? Why or why not? Can you propose a better policy?

1. Mexico represents a small part of the world orange market.

a. Draw a diagram depicting the equilibrium in the Mexican orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus.

b. Suppose that the world orange price is below the Mexican price before trade and that the Mexican orange market is now opened to trade. Identify the new equilibrium price, quantity consumed, quantity produced domestically, and quantity imported. Also show the change in the surplus of domestic consumers and producers. Has total surplus increased or decreased?

2. The world price of wine is below the price that would prevail in Canada in the absence of trade. a. Assuming that Canadian imports of wine are a small part of total world wine production, draw a graph for the Canadian market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.

b. Now suppose that an unusual shift of the

Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harvest there. What effect does this shock have on the world price of wine? Using your graph and table from part (a), show the effect on consumer surplus, producer surplus, and total surplus in Canada. Who are the winners and losers? Is Canada as a whole better or worse off?

3. Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry from foreign competition. Assuming that the United States is a price taker in the world auto market, show the following on a diagram: the change in the quantity of imports, the loss to U.S. consumers, the gain to U.S. manufacturers, government revenue, and the deadweight loss associated with the tariff. The loss to consumers can be decomposed into three pieces: a gain to domestic producers, revenue for the government, and a deadweight loss. Use your diagram to identify these three pieces. 4. When China‘s clothing industry expands, the increase in world supply lowers the world price of clothing.

a. Draw an appropriate diagram to analyze how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that imports clothing, such as the United States.

b. Now draw an appropriate diagram to show how this change in price affects consumer surplus, producer surplus, and total surplus in a nation that exports clothing, such as the Dominican Republic.

c. Compare your answers to parts (a) and (b). What are the similarities and what are the differences? Which country should be concerned about the expansion of the Chinese textile industry? Which country should be applauding it? Explain. 5. Imagine that winemakers in the state of Washington petitioned the state government to tax wines imported from California. They argue

members coming and going at various hours. The planner has found that the increased foot traffic improves the safety of the surrounding streets, an estimated benefit to the community of $2 per ticket. What kind of externality is this? Why?

d. On a new graph, illustrate the market for theater tickets in the case of these two externalities. Again, label the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, the efficient level of output, and the per-unit amount of both externalities. e. Describe a government policy that would result in an efficient outcome.

5. Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs on people who do not drink and drive. a. Illustrate the market for alcohol, labeling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output.

b. On your graph, shade the area corresponding to the deadweight loss of the market equilibrium. (Hint: The deadweight loss occurs because some units of alcohol are consumed for which the social cost exceeds the social value.) Explain.

6. Many observers believe that the levels of pollution in our society are too high. a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction at different firms?

b. Command-and-control approaches often rely on uniform reductions among firms. Why are these approaches generally unable to target the firms that should undertake bigger reductions?

c. Economists argue that appropriate corrective taxes or tradable pollution rights will result in efficient pollution reduction. How do these approaches target the firms that should

undertake bigger reductions?

7. The many identical residents of Whoville love drinking Zlurp. Each resident has the following willingness to pay for the tasty refreshment:

First bottle $5 Second bottle 4 Third bottle 3 Fourth bottle 2 Fifth bottle 1 Further bottles 0

a. The cost of producing Zlurp is $1.50, and the competitive suppliers sell it at this price. (The supply curve is horizontal.) How many bottles will each Whovillian consume? What is each person‘s consumer surplus? b. Producing Zlurp creates pollution. Each bottle has an external cost of $1. Taking this additional cost into account, what is total surplus per person in the allocation you described in part (a)?

c. Cindy Lou Who, one of the residents of Whoville, decides on her own to reduce her consumption of Zlurp by one bottle. What happens to Cindy‘s welfare (her consumer surplus minus the cost of pollution she experiences)? How does Cindy‘s decision affect total surplus in Whoville?

d. Mayor Grinch imposes a $1 tax on Zlurp. What is consumption per person now? Calculate consumer surplus, the external cost, government revenue, and total surplus per person.

e. Based on your calculations, would you support the mayor‘s policy? Why or why not? 8. Ringo loves playing rock ?n‘ roll music at high volume. Luciano loves opera and hates rock ?n‘ roll. Unfortunately, they are next-door neighbors in an apartment building with paper-thin walls.

a. What is the externality here?

b. What command-and-control policy might the landlord impose? Could such a policy lead to an inefficient outcome?

c. Suppose the landlord lets the tenants do

whatever they want. According to the Coase theorem, how might Ringo and Luciano reach an efficient outcome on their own? What might prevent them from reaching an efficient outcome?

9. Figure 4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution.

a. Using graphs similar to those in Figure 4, illustrate the effect of this development on the demand for pollution rights.

b. What is the effect on the price and quantity of pollution under each regulatory system? Explain.

10. Suppose that the government decides to issue tradable permits for a certain form of pollution. a. Does it matter for economic efficiency whether the government distributes or auctions the permits? Why or why not? b. If the government chooses to distribute the permits, does the allocation of permits among firms matter for efficiency? Explain.

11. There are three industrial firms in Happy Valley.

Initial Cost of Reducing

Firm Pollution Level Pollution by 1 Unit

A 70 units $20 B 80 units $25 C 50 units $10

The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.

a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation?

b. How much higher would the costs of pollution reduction be if the permits could not be traded

1. Think about the goods and services provided by your local government.

a. Using the classification in Figure 1, explain which category each of the following goods falls into:

? police protection ? snow plowing ? education ? rural roads ? city streets

b. Why do you think the government provides items that are not public goods?

2. Both public goods and common resources involve externalities.

a. Are the externalities associated with public goods generally positive or negative? Use examples in your answer. Is the free-market quantity of public goods generally greater or less than the efficient quantity?

b. Are the externalities associated with common resources generally positive or negative? Use examples in your answer. Is the free-market use of common resources generally greater or less than the efficient use?

3. Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fundraising drives.

a. What name do economists have for people like Charlie?

b. How can the government solve the problem caused by people like Charlie?

c. Can you think of ways the private market can solve this problem? How does the existence of cable TV alter the situation?

4. Wireless, high-speed Internet is provided for free in the airport of the city of Communityville. a. At first, only a few people use the service. What type of a good is this and why? b. Eventually, as more people find out about the service and start using it, the speed of the connection begins to fall. Now what type of a

good is the wireless Internet service? c. What problem might result and why? What is one possible way to correct this problem? 5. Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film:

Judd Joel Gus Tim

First film $7 $5 $3 $2 Second film 6 4 2 1 Third film 5 3 1 0 Fourth film 4 2 0 0 Fifth film 3 1 0 0

a. Within the dorm room, is the showing of a movie a public good? Why or why not? b. If it costs $8 to rent a movie, how many movies should the roommates rent to maximize total surplus?

c. If they choose the optimal number from part (b) and then split the cost of renting the movies equally, how much surplus does each person obtain from watching the movies? d. Is there any way to split the cost to ensure that everyone benefits? What practical problems does this solution raise? e. Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally. When Judd is asked his willingness to pay, will he have an incentive to tell the truth? If so, why? If not, what will he be tempted to say?

f. What does this example teach you about the optimal provision of public goods?

6. Some economists argue that private firms will not undertake the efficient amount of basic scientific research.

a. Explain why this might be so. In your answer, classify basic research in one of the categories shown in Figure 1.

b. What sort of policy has the United States adopted in response to this problem?

c. It is often argued that this policy increases the technological capability of American producers

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