Questions: 1. Draw a market with typical Supply and Demand curves. Graphically identify the market equilibrium, the consumer surplus, and the producer surplus. Draw a new graph for each of the following exercises.
a. Illustrate graphically how a per-unit tax on consumers would affect the market. Identify the new consumer surplus and producer surplus and any deadweight welfare loss. Discuss the equity and efficiency implications.
b. Illustrate graphically a binding price floor. Again, identify the new consumer surplus and producer surplus and any deadweight welfare loss. Discuss the equity and efficiency implications.
c. Illustrate graphically a binding price ceiling. Again, identify the new consumer surplus and producer surplus and any deadweight welfare loss. Discuss the equity and efficiency implications.
2. One of the core principles I want students to take away from the class is what we've called the "economic decision-making rule," and informs our theory of individual behavior.
a. Write what the economic decision-making rule is and define marginal analysis.
b. Define sunk costs and opportunity costs and discuss which of the two should be included when engaging in marginal analysis.
c. Explain three contexts where we have seen the economic-decision make rule, interpret it in these contexts, and explain how they inform optimal decision-making (for example, a perfectly competitive firm sets P=MC to maximize profits, which is an application of the economic decision-making rule).
3. Illustrate graphically the monopolist's profit maximization problem. Include the monopolist's profit-maximizing price and level of output, any consumer surplus, any producer surplus, and any deadweight welfare loss. What are the equity and efficiency implications?