Costs and Public Goods

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Due dates for each section are provided in the Course Description.
Part A – Microeconomics – Worth 10% of total assessment:
Answer any five (5) of the following questions. Each question is worth 10 marks;

Question 1:

(a) Explain the impact of external costs and external benefits on resource allocation; (2.5 marks)
Ans : Resources are over - allocated when negative externalities exist because the equilibrium price is too low. Resources are under - allocated when positive externalities exist because the equilibrium price is too high

(b)Why are public goods not produced in sufficient quantities by private markets? (2.5 marks)
Ans :The main reason is that of free rider
…show more content…
(4 marks)

Are these firms operating in the short or the long run? (1 mark) Firm A: short run / long run Firm B: short run / long run
(c) Are these firms operating under perfect or imperfect competition? Firm A: perfect / imperfect (1 mark) Firm B: perfect / imperfect

(d) What level of output will these firms produce in the short run? Firm A: (2 marks) Firm B:
How would you describe their profit positions? (2 marks)

Firm A:
Firm B:

Question 4:

(a) Suppose you own a coffee shop. List some of the fixed inputs and variable inputs you would use in operating the shop. (4 marks)
Ans : An input whose quantity can be changed in the time period under consideration, the most common example of a variable input is labour. Other hand fixed input like capital, provides the capacity constraint in production. Costs of production that do not change when the output changes (e.g. factory rent or, coffee shop rent)
Variable inputs are Costs of production that change when the output changes (e.g. cost of materials or wages and such as land, labour and capital and in a short given time period, at least one input such as land (e.g. rent) or capital (e.g. equipment lease) is fixed or unchanging.

Land & Capital = Fixed Input Fixed Costs
Labour = Variable Input Variable Costs

(b) Baubles and Beads manufacturing produces 100
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