1. Decide whether the following are true, false, or uncertain and thoroughly exp
ID: 1196015 • Letter: 1
Question
1. Decide whether the following are true, false, or uncertain and thoroughly explain your reasoning.
(a) (Review) If AC > MC at the firm’s chosen output level, then the firm is producing on the upward sloping part of its AC curve.
(b) When an unregulated market creates positive externalities it tends to produce too little and when it creates negative externalities tends to produce too much.
(c) Charging a toll on an uncongested highway increases total surplus because this creates revenue to pay for building and maintaining the highway. (d) Charging a toll on a congested bridge increases total surplus because it reduces the number of drivers and thereby reduces congestion.
(e) If a public good cannot be paid for through user fees, then it should not be provided.
(f) The costs of National Parks should be covered by charging admission fees, because we shouldn’t have National Parks if the people who use them are not willing to pay enough to cover these costs.
(g) You have been offered an investment opportunity that would require you to put up $10,000. The investment would pay $500/year for each of the next 10 years. You would also get your initial $10,000 investment back at the end of 10 years, and you believe there is zero risk of default. The interest rate on 10-year treasury bills is 6%. It is a good idea to invest.
Explanation / Answer
If AC > MC at the firm’s chosen output level, then the firm is producing on the upward sloping part of its AC curve. False. Explanation - The MC curve intersects the AC curve at its minimum. That is MC = AC. Before that, the AC is higher than the MC and after the intersection the MC is higher than the AC. The AC slowly reduces to intersect MC at its minimum which means the AC curve is downward sloping when AC > MC.
When an unregulated market creates positive externalities it tends to produce too little and when it creates negative externalities tends to produce too much. True. Explanation - When a negative externality exists in an unregulated market, producers don't take responsibility for external costs that exist--these are passed on to society. Thus producers have lower marginal costs than they would otherwise have and the supply curve is effectively shifted down (to the right) of the supply curve that society faces. Because the supply curve is increased, more of the product is bought than the efficient amount--that is, too much of the product is produced and sold.
Charging a toll on an uncongested highway increases total surplus because this creates revenue to pay for building and maintaining the highway. True. The highway is already uncongested which means the public will take this route for time saving and hence charging a toll for whatever vehicle that use the highway will eventually add up to the total revenue generated.
Charging a toll on a congested bridge increases total surplus because it reduces the number of drivers and thereby reduces congestion. False. Reducing the number of drivers on the highway means losing on the revenue that could have been generated by them.
If a public good cannot be paid for through user fees, then it should not be provided. True. Explanation - Everyone pays taxes, but only the users of a publicly provided service pay user fees. So when the users are only a small segment of the taxpaying population, it may be more fair to make that small minority pay for the service through their fees than have the majority pay for something they derive no benefit from.
The costs of National Parks should be covered by charging admission fees, because we shouldn’t have National Parks if the people who use them are not willing to pay enough to cover these costs. True. Self explanatory statement.
You have been offered an investment opportunity that would require you to put up $10,000. The investment would pay $500/year for each of the next 10 years. You would also get your initial $10,000 investment back at the end of 10 years, and you believe there is zero risk of default. The interest rate on 10-year treasury bills is 6%. It is a good idea to invest. False. Explanation - Because the treasury bills are giving you 6% per year that comes to 10000 x 0.06 = $600 per year which is higher than the investment offered. Moreover treasury bills are considered as the safest and risk free investments.
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