Question

1. Assume that the price underestimates the value that society places on the flu vaccine. If firms produce where P = MC, firms will be producing ________ the socially efficient amount of flu vaccine.

a) exactly

b)more than

c)less than

d)sometimes more than and sometimes less than

2. You value your economics textbook at $15. Someone else values it at $30, and that person is willing to pay you $20 for your textbook. Would selling your textbook to this person for $20 be a Pareto improvement?

a) No, because you did not receive the maximum amount the other person would have been willing to pay for the textbook

b) No, the person paid you $20 for the book so his net benefit was $10, whereas your net benefit was only $5. For this change to be Pareto efficient, each of you should have the same net benefit

c) Yes, because both of you are better off as a result of the trade

d) Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss

Answer 1

(1) (c)

If price underestimates value of the vaccine, the marginal social benefit (MSB) will be higher than marginal private benefit (P = PMB), and MSB curve will lie to the right of PMB curve. Since market equilibrium is at intersection of PMB & MC but social outcome is at intersection of MSB & MC, the market price will be less than socially efficient price.

(2) (c)

Since I am getting $5 (= $20 - $15) more than the value I place on the book, I will be better-off. Since the other person will be paying $10 (= $30 - $20) less than the value she places on the book, she too will be better-off.