Problem set 2

THIS IS WORTH 7.5/10 POINTS OF YEAR 2023/24/1

1)
True.
If something is part of the private market that means it has clear and enforced ownership,
and so its owner will try to maximize their gain from it. While if it is in the public sphere it is
unowned, so it is also nonexcludable, which means it will tend to be overused and
undermaintained. This is called the tragedy of the commons.
2)
If the factory is granted right of causing noise:
The house owner will have to tolerate the noise, pay for soundproofing or paying the factory
enough to compensate for the loss of production if output is reduced. The factory will
continue producing at its optimal rate, creating the negative externality of noise.
The final outcome will depend of the cost of soundproofing, the willingness of the factory to
negotiate, the willingness of the house owner to pay for silence and the cost of reducing
production for the factory.
If the house’s owner is granted right to silence:
The owner has to agree to any noise made, so the factory would have to either reduce
output, or negotiate a compensation with the owner or offer to apply soundproofing to the
owner’s house. What it decides to do depends on the willingness of the house owner to
negotiate and accept compensation; on the price of soundproofing and the difference
between full scale and reduced output (so the amount the firm is willing to pay)
3)
The government should invest in R&D that cannot (easily) be turned I to money or sold,
because these are the areas where private entrepreneurs will likely not invest in. Basically, if
we see large firms in the real world built on researching a certain are, that is most likely best
left to private companies.
Drug research: there will always be sick people, so there is always big money to be made
from drugs and medicine. It is best left to private companies.
Vaccines: Similar to drug research, however here the emphasis is on prevention. So
vaccines can be argued to be a form of biological insurance, which is historically one of the
most lucrative types of business. Not to mention that through government contracts and
obligatory vaccines for children the will be always new clients (as there will always be new
children born)
Research in economics or physics: Economics and especially physics is always trying to
further human knowledge, but it often occupies itself with niche problems and solutions,
which will only affect the market years, perhaps decades later when commercial tech has
caught up to it. The state should finance such research.
Information Technology: Tech is one of the fastest paced areas, with new gadgets constantly
hitting the market, ready to be sold, only to be replaced with the new high-tech a few years
later. Large companies like Samsung and Sony are always trying to one-up each others’
technological advances. It should be left to the private sector.
4)
Restaurants, bars and hotels have huge assets: land, buildings and equipment, which
usually are amortized slowly, especially when out of use. It may be worth it for such firms to
continue to function, swallowing the temporary losses, because by their calculations
stopping and then restarting, or selling their assets and entering another industry would cost
more.
If non-monetary arguments are taken into consideration as well, some, especially small
family firms, where the staff and the owner(s) may know each other, the
management/owner(s) may feel it their moral responsibility to continue to provide a livelihood
for their subordinates.
5)
True.
Democracy is the most efficient because it based of free choice of the people; and political
freedom and economic freedom are inseparable. Thus, democracy maximizes the amount of
willing transactions. Assuming that people are profit maximizing, these willingly made
transactions will be mutually beneficial. So democracy maximizes mutually beneficial
transactions.
Real communism, the kind imagined by utopistic ideologues might be a better solution, but it
is practically impossible. Not only would we need a quantum computer to handle all logistics
and calculations required, we would also need to convince people to work for no other
reason than the good of the system and finally there would be need of an Artificial General
Intelligence to correctly guess all preferences correctly, essentially requiring the human race
to reach singularity, at which point the probability of being a post-scarcity civilization already
exists.
6)
Uncertain.
MC is the cost of producing an additional unit.
A firm’s optimal output is where MC = MR
But if MC rises, the firm’s optimum will change, and the company will produce less, and it will
lose profit.
It is possible that a rise of ‘x’ in MC will mean exactly a loss of ‘x’ in profit, but it is not certain.
If we take the lecture example of oil production by Nodding Donkeys (lecture 4)
Barrels of oil produced TR TC Profit (Π) MR MC Change in profit
6 300 120 180 50 29 21
7 350 156 194 50 36 14
8 400 206 194 50 50 0
9 450 296 154 50 90 -40

If in this case MC rises by 20, the company will only produce 6 barrels, and will lose 21,
more than the amount MC rose by.
7)
Uncertain.
It depends whether the gain of smokers by smoking in bars and restaurants is greater than
the loss of non-smokers, who have to inhale the smoke, suffering negative externalities; or
the gain of non-smokers is greater by restricting smokers.
8)
In equilibrium:
It is only worth keeping a cow if the costs don’t outweigh the benefits
Cost is 1000
Revenue from a cow is (900-x)*100
When these two are equal we have an equilibrium
(900-x)*100 = 1000
900-x = 10
x = 890
There are 890 cows in equilibrium
Since there are no externalities implied here, that are not dealt with by the market, the social
optimum should be the same.
9)
Yes.
The firm’s optimum (since this is assumed to be a competitive market) is P = MC
P = 200
MC = 8q+20
200 = 8q+20
180 = 8q
q = 22.5
10)
No.
A firm will stay in the long run if P>AC
P=200
AC = TC/q = (4q^2+20q+40000)/q = 4q+20+40000/q
Since q = 22.5
AC = 4*22.5+20+40000/22.5 = 90+20+1777.78 = 1887.78
200<1887.78 so P<AC, so it is not profitable to stay in the industry long term.