Economist N Gregory Mankiw

1. Economist N Gregory Mankiw is quoted ( The New York Times, March 18,2008, p. C9) as suggesting,” If you have flood insurance. You are more likely to build your house on a flood plan, and: if you have fire insurance, you’ll be less careful about smoking on the couch.” What concept is professor Mnakiw describe? Briefly explain it.

2. Use graph to illustrate your answer. Explain why market tend to overproduce goods with external costs.

3. Given the graph below, show the CS and PS on the graph. Define consumer surplus and calculate its size.

4. How might the government use market forces to encourage recycling?


5. Answer the following question about consumer choice.
a. Calculate the marginal utility and complete the table.
b. Assume that you have $12 food budget. A loaf of bread costs $2 and a box of cereal cost $3 each. Create a budget allocation table.
c. Complete the following table. What will be your equilibrium allocation?

6. The figure below shows the cost cures of a firm in a competitive industry.
A. if the market sets a price of $9 a unit, how much output will this firm produce?
What is the approximate profit (or loss) of the firm? Show it on the graph.
b. if market price is $4a unit, how much output will this firm produce?
c. At what price will this firm shut down and produce no output at all?

7. Company ABC has the cost structure shown in the following table. Labor is paid $80 per worker.
a.  Fill in the table below.
b. ABC sells its products in the competitive market for $16 each, Based on the profit maximizing rule, what is the profit-maximizing  quantity of bats? What its profit  at this output level?
c. Based on your calculations above graph ATC,AVC and MC.

8. The figures below show the market demand and supply for a competitive industry (left) and the costs of a typical firm in this industry (right). Answer the following questions.
a. Does the firm have a profit or loss at the current market price? Show it on the graph.
b. How would the industry supply change in the long run? Why? Show the Shift of the supply curve on the graph.
c. What’s the equilibrium price for the market in the long run? How much profit does a typical firm earn at this price?