1.When the government places a production subsidy on a product in an efficient m
ID: 1107171 • Letter: 1
Question
1.When the government places a production subsidy on a product in an efficient market
a. without additional information, such as the elasticity of demand for this product, it is impossible to compare the welfare gains of the sellers with the welfare gains of the buyers.
b. the welfare (surplus) gains to buyers and sellers will be more than the amount of government spending on the subsidy.
c. the welfare of the sellers will rise by more than the welfare of the buyers.
d. the welfare of consumers will rise by more than the welfare of producers.
e. none of the above.
2.Which of the following could decrease the demand for paper?
a. A decrease in the price of tablets.
b. An increase in consumer incomes.
c. An increase in the price of paper.
d. An increase in the price of timber.
e. None of the above
3.A perfectly price discriminating monopolist will.
a. sells more units than it would if it could not price discriminate
b. decrease consumer surplus by price discriminating
c. lose profits if it sets fewer prices
d. all of the above
e. none of the above
Explanation / Answer
1.
.When the government places a production subsidy on a product in an efficient market the welfare (surplus) gains to buyers and sellers will be more than the amount of government spending on the subsidy.
This is because in an efficient market the total surplus( CS+PS) is maximised, so with the government intervention there will be inefficiency in the market, so the total surplus decreases with the government intervention in the market.
Hence option b is the correct answer.
(2)
A decrease in the price of the tablet which causes a decrease in the price of paper because a tablet is substitute goods of paper because anything printed on paper can also be read on the tablet. So with the decrease in the price of the tablet, it is cheaper to use a tablet instead of paper.
Hence with the decrease in the price of the tablet, there will be a decrease in the demand for paper.
Hence option a is the correct answer.
(3)
3.A perfect price discriminating monopolist will.
a. sells more units than it would if it could not price discriminate.
This true because if monopolist set a single price, then usually it set higher price compare to price discriminating strategy. Therefore at a higher price, there will be less demand.
b. decrease consumer surplus by price discriminating.
This is also true because if the monopolist uses price discriminating policy, then monopolist charges higher price those who can pay more and monopolist sells rest goods at the lower price those who cannot pay high price. It means monopolist extract consumer surplus with the price discriminating policy.
c. lose profits if it sets fewer prices.
This is also true because if monopolist set a lower price for different kind of consumers for all goods, it means he will get lower profit at each output.Therefore if monopolist set lower price, it means he loses total profit by setting lower price for all goods sold.
d. Since option, a, b and c are correct about perfectly price discriminating monopolist.
hence option d is the correct answer and option d is all of the above.
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