AREC PREP EXAM QUESTIONS WITH 100%
VERIFIED CORRECT ANSWERS!!
Which of the following statements about the comparison between a single-price monopolist
and a price- discriminating monopolist (with the same demand and cost curves) is correct?
Producer Surplus is higher in a price-discriminating monopoly.
The marginal cost of the second cup is
$0.20
Assuming that she has to charge a single price, the marginal revenue from selling an second
cup of lemonade is
$0.60
What price should Beth charge if she wants to maximize total economic surplus for the
entire market?
$0.20
How many cups of lemonade should Beth sell if she wants to maximize total economic
surplus?
6 cups of lemonade
Now suppose Beth can tell the reservation price of each person and can perfectly price-
discriminate (charge different consumers different prices). How many cups of lemonade
should Beth sell if she wants to maximize her profits?
Beth should sell 9 cups of lemonade to maximize her profits.
How many computers will the monopolist sell to maximize profits?
20
At what price will the monopolist sell each computer?
$250
, If an activity causes externalities, how do the quantity determined in a market without
government intervention and the socially optimal quantity compare? With positive
externalities the equilibrium quantity in a market is __________ (i) compared to the
socially optimal quantity, and with negative externalities the equilibrium quantity is
______(ii) compared to the socially optimal quantity.
(i) too low, (ii) too high
In this situation, in a market left to itself a quantity of (i) _______ would be produced and
sold, while the socially optimal quantity is (ii)________
(i) 12, (ii) 8
Now assume that producers have to pay a tax of $500 for each ton they produce. We expect
that
the market quantity will be smaller than without the tax but not as small as the socially optimal
quantity.
Now assume that producers have to pay a tax of $1,000 for each ton they produce. We
expect that
the market quantity will be equal to the socially optimal quantity
Assume Ben's production of ice cream causes external costs (due to pollution) of $30 to
jerry. It would cost Ben $10 to install a machine that would stop the pollution, but he could
still produce ice cream. Assume further Ben has the legal right to pollute, and that Ben and
Jerry can negotiate easily . Then we can expect in this situation that
Jerry pays Ben between $10 and $30 so that Ben installs the machine that would stop the
pollution
Assume again Ben's production causes external costs of $30 to Jerry. It would cost Ben $10
to install a machine that would stop the pollution. Assume further that this time Jerry has
the legal right to no pollution =, and that Ben and Jerry can negotiate easily. Then we can
expect in this situation that
VERIFIED CORRECT ANSWERS!!
Which of the following statements about the comparison between a single-price monopolist
and a price- discriminating monopolist (with the same demand and cost curves) is correct?
Producer Surplus is higher in a price-discriminating monopoly.
The marginal cost of the second cup is
$0.20
Assuming that she has to charge a single price, the marginal revenue from selling an second
cup of lemonade is
$0.60
What price should Beth charge if she wants to maximize total economic surplus for the
entire market?
$0.20
How many cups of lemonade should Beth sell if she wants to maximize total economic
surplus?
6 cups of lemonade
Now suppose Beth can tell the reservation price of each person and can perfectly price-
discriminate (charge different consumers different prices). How many cups of lemonade
should Beth sell if she wants to maximize her profits?
Beth should sell 9 cups of lemonade to maximize her profits.
How many computers will the monopolist sell to maximize profits?
20
At what price will the monopolist sell each computer?
$250
, If an activity causes externalities, how do the quantity determined in a market without
government intervention and the socially optimal quantity compare? With positive
externalities the equilibrium quantity in a market is __________ (i) compared to the
socially optimal quantity, and with negative externalities the equilibrium quantity is
______(ii) compared to the socially optimal quantity.
(i) too low, (ii) too high
In this situation, in a market left to itself a quantity of (i) _______ would be produced and
sold, while the socially optimal quantity is (ii)________
(i) 12, (ii) 8
Now assume that producers have to pay a tax of $500 for each ton they produce. We expect
that
the market quantity will be smaller than without the tax but not as small as the socially optimal
quantity.
Now assume that producers have to pay a tax of $1,000 for each ton they produce. We
expect that
the market quantity will be equal to the socially optimal quantity
Assume Ben's production of ice cream causes external costs (due to pollution) of $30 to
jerry. It would cost Ben $10 to install a machine that would stop the pollution, but he could
still produce ice cream. Assume further Ben has the legal right to pollute, and that Ben and
Jerry can negotiate easily . Then we can expect in this situation that
Jerry pays Ben between $10 and $30 so that Ben installs the machine that would stop the
pollution
Assume again Ben's production causes external costs of $30 to Jerry. It would cost Ben $10
to install a machine that would stop the pollution. Assume further that this time Jerry has
the legal right to no pollution =, and that Ben and Jerry can negotiate easily. Then we can
expect in this situation that
