week 6 - important book notes

Question 1

what is the effect of a subsidy in a market with a horizontal supply curve ? with a vertical curve ?

Answer 1

the entire subsidy gets passed along to the consumers if the supply curve is flat, but the subsidy is totally received by the producers when the supply curve is vertical

Question 2

suppose the demand curve is vertical, the supply curve slopes upwards. if a tax is imposed in the market who ends up paying for it

Answer 2

the consumer

Question 3

suppose all consumers view red and blue pencils as perfect substitutes. suppose that the supply curve for re pencils is upward sloping. let the price of red and blue pencils be pr and pb. what would happen if the government put a tax only on red pencils

Answer 3

in this case the demand curve for red pencils is horizontal at price Pb, since that is the most that they would be willing to pay for a red pencil. thus, if a tax is imposed on red pencils, consumers will end up paying Pb for them, so the entire amount of the tax will end up being borne by the producers (if any red pencils are sold at all - it could be that the tax would induce the producer to get out of the red pencil business

Question 4

supply curve is vertical, what is the deadweight loss of the market

Answer 4

zero. dwl measures value of lost output. since the same amount is supplied before and after the tax there is no dwl

Question 5

consider the production function f(x1, x2) = x1 (2), x2(2)). does this exhibit increasing returns to scale

Answer 5

increasing

Question 6

is the production function for values of f(x1,x2) = (4x1 (1/2) x2(1/3)

Answer 6

decreasing

Question 7

Ax1(a)x2(b). is a Cobb Douglas.
which values of a and b will be associated with different kinds of returns to scale

Answer 7

If a + b = 1, we have constant returns to scale, a + b < 1 gives decreasing returns to scale, and a + b > 1 gives increasing returns to scale.

Question 8

the technical rate of substitution between factors x2 and x1 is -4. if you desire to produce the same amount of output but cut your use of x1 by 3 units, how many more units of x2 will you need

Answer 8

4x3 = 12 units

Question 9

true of false. the law of diminishing marginal product did not hold, the world food supply could be grown in a. flowerpot.

Answer 9

true

Answer 10

yes