Problem
A. Using a graph and the concepts of consumer and producer surplus, explain why even though water is essential for human life, its market price is much lower than the price of many non-essential products like diamonds.
B. Explain two ways that companies try to unfairly limit competition in their industry and explain in detail how this affects the level of consumer welfare in the economy.
C. People are willing to pay more for wild-caught fish (which are costly to catch) than for farmed fish (which are cheaper to produce) but they cannot tell the difference between wild and farmed fish when they see the fish in a shop. Explain in detail what is the nature of the market failure and what can happen to the market for wild-caught fish if that problem is not addressed. Could government regulation affect this outcome?
D. Explain the difference between base money and bank money, how this adds to the liquidity risks face by commercial banks, and how central banks can help commercial banks to manage their liquidity risks.