1. Draw a supply and demand graph and identify the areas of consumer surplus and producer surplus. Given the demand curve, what impact will an increase in supply have on the amount of consumer surplus shown in your diagram?
2. Use the ideas of consumer surplus and producer surplus to explain why economists say competitive markets are efficient. Why are below- or above-equilbrium levels of output inefficient, according to these two sets of ideas?
3. Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve?
4. Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government? A. French fries. B. airport screenings. C. Court systems. D. Mail Delivery. and E. Medical care. State why you answered as you did in each case.
5. Explain the following statement. The optimal amount of pollution abatement for some substances, say, dirty water from storm drains, is very low; the optimal amount of abatement for other substances, say, cyanide poison, is close to 100 percent.