1) Consider the production function: Q= 12L- 2L2. Where Q is quantity of output, and L is labor. What is the average product?
2) Consider the production function: Q= K1/3 L2/3. Where Q is quantity of output, K is capital, and L is labor. Does this function exhibit increasing, diminishing, or constant returns to scale?
3) Why does a monopoly lead to allocative inefficiency in the market? Use the concepts of consumer surplus, producer surplus, and "deadweight loss" in your answer. (Draw a graph if you find it helpful.)
4) Explain the concept of "negative externalities." Give an example. In your example, why does the presence of negative externalities prevent a competitive market from reaching an allocatively efficient outcome?