Economics Homework Ten Answers - Student Eighteen

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Michelle F

1. In your own words, try to give a better definition of "externalities" than provided by this Lecture.

Some sort of effect, whether negative or positive, on a party other than the buyer or seller.

Terrific, could use as a model.

2. Explain why marginal revenue must be zero when total revenue is maximized.

If MR>0, then you might be able to further optimize your profits. If you stopped at MR=0.1, you might still be able to make another unit at MR=0.05. Only when MR=0 do you know for certain that your profits are maximized.

Correct. Good use of limit-like analysis, as MR->0.

3. What is your favorite question on the midterm exam that you answered incorrectly, and why is it your favorite?

Question 21, the one about the indifference curve. I remember looking at the indifference curve in Lecture Four and thinking, “This is not something I’m going to remember easily. I should probably study it and think of a good way to remember it.” Obviously I never did, but I found it rather amusing. I think I’ll probably study the lectures that we learned about indifference and elasticity much more, because those were the questions I missed.

Excellent analysis of how you can improve. You did very well anyway, but there is always room for everyone to improve further.

4. Give an example of a positive externality, and an example of a negative externality. The example does not have to be limited to a business.

Positive externality: We used to have a neighbor who had really cool Christmas lights, and while the neighbor paid the electricity bill, we still got to enjoy looking at the lights.

Negative Externality: When you are in the doctor’s office or some kind of medical facility, you are provided with free exposure to all the various germs, viruses and bacteria that people going to see the physician are unwitting carriers of.

Terrific examples! I enjoyed both of those very much.

5. Explain why private firms in the free market are unlikely to try to provide public goods.

Because a good that would be freely available to everyone, regardless of whether or not they purchased it, paid dues for it, or even desired, would generate no profit. The firm providing it would go bankrupt in no time flat! If the good could be enjoyed by a large group of people at one time, then that group might only buy one. If the good were a private one, then a large group of people might buy several. As a private firm, the more of your good that people bought the larger your firm’s profits will be.

Right.

6. Review question: the cross-elasticity of A with respect to B is positive, and C with respect to D is negative. What is the relationship (complement or substitute?) of goods A and B with each other, and C and D with each other? Explain.

A and B are substitutes and C and D are complements. Since the cross-elasticity of goods A and B is positive, that means that whenever the price of one of the goods goes up, the demand for the other good increases as well. If the cross-elasticity were negative, that would mean that when the price of one good goes up, the demand for the other good goes down, as is the case for goods C and D.

Correct.

Honors

8. Mathematically prove (or disprove!) the answer to the question on the midterm exam about P=30/Q.

P-Price, Q-Quantity, 30-Revenue. Price and quantity are both represented by variables, but revenue is represented by a definite number. Therefore, in this equation price and quantity are changeable, but revenue is fixed, no matter what number you put in for them. For example, the supplier could set the price at $5. The equation would be 5=30/6. Or if the supplier lowered the price to $2, the revenue would still only be $30. That’s because when the price elasticity is 1, the revenue is always the same.

Terrific. I might try a more formal and rigorous mathematical proof and include it in the model answers.

9. Provide, in your own words, the best definition of "public good" that you can.

A public good is a good or service available to all whether or not they want it, and regardless of how many people are already using it.

That's a superb definition, but it might state more expressly how the public does not pay on an individual basis for it. However, that is implicit in your definition.

10. Find a question on the midterm that describes a situation that would be unusual in the real world, and explain why the scenario of the question is unrealistic.

Unit elasticity of demand is shown in the problem about P=30/Q. A similar situation is given in problem 22, when an owner of a company finds he cannot increase his revenue. The price elasticity of his good is also unit elasticity. In the real world, usually when you change the price of the good you are selling, the demand decreases (except for Giffen goods). I don’t know if there ever has been an occasion where a good had unit elasticity, or if it is simply another one of those terms developed to describe something nonexistent.

The demand does always decrease due to the Law of Demand, but unit elasticity means revenue (PxQ) is constant. Please look at this again and straighten out the difference between demand decreasing (which always happens when price increases) and revenue decreasing, which requires looking not just at the change in Q, but the change in PxQ. (Minus 1).
89/90. Superb answers! Congratulations and have a happy and blessed Thanksgiving with your family.--Andy Schlafly 10:58, 26 November 2009 (EST)
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