Economics-2 Final Examination

PART-A
Question-1 : Describe the difference between marginal cost and average total cost.
Why are both of these costs important to a profit-maximizing firm?

Question-2: Assume that a local bank sells two services, checking accounts and ATM
card services. Mr. Donethat is willing to pay $8 a month for the bank to service his
checking account and $10 a month for unlimited use of his ATM card. Ms. Beenthere
is willing to pay only $5 for a checking account, but is willing to pay $15 for
unlimited use of her ATM card. Assume that the bank can provide each of these
services at zero marginal cost.
A. If the bank is unable to use tying, what is the profit-maximizing price to charge
for a checking account?
B. If the bank is unable to use tying, what is the profit-maximizing price to charge
for unlimited use of an ATM card?
C. If the bank is able to use tying to price checking account and ATM service, what is
the profit-maximizing price to charge for the tied good?
D. How much additional profit does the bank make when it switches to use of a
tying strategy to price checking account and ATM service?
E. How much total surplus is generated from using tying to price the checking
account and ATM service? How does that compare to the nontied pricing strategy?
Which strategy has the largest deadweight loss?

Question-3: Describe a government created monopoly. Why might one be created?

Give an example.

PART-II
Question-1: The consumption of alcohol is often cited as an example of a negative
externality. Explain a situation in which the consumption of alcohol would be
considered to be a negative externality.

Question-2: Identify each of the following goods as a private good, a common

resource, a natural monopoly, or a public good, according to the classification
presented in your textbook.
A. A shared apartment
B. A national monument

C. Cable TV

Question-3: Explain the role of opportunity cost in differentiating between economic

profits and accounting profits.

Question-4: Lets assume that a monopolist decides to maximize revenue rather

than profit. How does this operating objective change the size of the deadweight
loss? If youre a benevolent manager of a monopoly firm and are interested in
reducing the deadweight loss of monopoly, should you maximize profits or
maximize revenue? Carefully explain your answer.

Question-5: Professional organizations (such as the American Medical Association

and the American Bar Association) have actively advocated regulation to restrict the
right of professionals to advertise. Describe the economic incentives that might
exist for incumbent professionals to restrict advertising.

Question-6: Joe Kelp owns a commercial fishing fleet, and hires a captain for each
boat in his fleet. These workers are considered to be part of the crew. In the market
for fresh Pacific salmon, Joe is one of thousands of fishermen. Although Joe usually
catches a significant number of fish each year, his contribution to the entire salmon
harvet is negligible relative to the size of the market. Joe is considered to be a
perfect competitor in the output market. If so, explain why his demand curve for
labor (crew workers) is downward-sloping, and his supply curve for labor is perfectly
elastic at the market wage.

Question-7: Describe the role that diminishing marginal utility plays in the utilitarian
argument for redistribution of income.

Question-8: Describe the purpose of antitrust laws. What do they accomplish?

Question-9: What is the effective marginal tax rate of a government antipoverty

program that guarantees every family a minimum income? Explain. Why might
trying several antipoverty benefits to income level lead to an effective marginal tax
rate of greater than 100 percent?

Question-10: Explain the difference between inferior goods and normal goods. As a
developing economy experiences increases in income (measured by GDP), what do
you predict will happen to the demand for inferior goods?

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