1. Denver is the owner of the 7-11 Mini Mart, Dallas is the owner of the Super America Mini Mart and together they are the only gas stations in town. At the current price of $3 per gallon both receive total revenues of $1,000. Denver is considering cutting his price to $2.90, which would increase his total revenue to $1,350 if Dallas continues to charge $3. If Dallas' price remains $3 after Denver cuts his price, Dallas will collect $500 in revenues. If Dallas cuts his price to $2.90, his total revenues would also rise to $1,350 if Denver continues to charge $3. Denver will collect $500 in revenues if he keeps his price at $3 while Dallas lowers his to $2.90. Denver and Dallas will receive $900 each in total revenue if they both lower their price to $2.90. What will Denver and Dallas end up doing? Why?
2. Bob lives in a residential neighborhood that prides itself on well groomed lawns. Bob's neighbors find that the marginal benefit of someone else's well groomed lawn is $10. Bob, however, receives the same net benefit from an unkempt lawn as a well groomed lawn: zero (an unkept lawn looks bad but costs nothing; a well groomed lawn looks nice but is costly).
a. The issue of Bob, his neighbors, and the state of his lawn is an example of a(n)
A) positive externality. D) positional externality
B) commitment problem. E) prisoner's dilemma.
C) negative externality.
b. If Bob acts independently, he will have a(n) __________ and total economic surplus to the neighborhood will be __________.
A) well groomed lawn; 0 D) unkempt lawn; $5
B) well groomed lawn; $5 E) unkempt lawn; $10
C) unkempt lawn; 0
c. One possible solution is suggested by the following: suggests that
A) the rest of the neighborhood will have to live with Bob.
B) Bob's neighbors should pass a law requiring well groomed lawns.
C) Bob's neighbors could pay Bob to have a well groomed lawn and be better off.
D) Bob's neighbors could pay Bob to have a well groomed lawn and be no better off.
E) Bob has undervalued a well groomed law
3. Adam Smith made an "ethical" case for the virtues of the free market. What did he say and how is his claim depicted in the demand and supply model? - Add new information to support/refute Adam Smith's claim.
4. Suppose you are a monopolist in the market for a specific computer game. Your demand curve is given by P = 80 - Q/2; your marginal cost curve is MC = Q. Your fixed cost is equal to $300.
a) Graph the demand and marginal cost curves
b) Calculate and indicate on the graph the equilibrium price and quantity