Question

1. Suppose that only a few firms operate in a particular market, and compete by choosing quantity of output, but there are no barriers to entry, so that other firms could easily enter the market with the same cost functions as existing firms

Group of answer choices

The threat of entry will drive the price of the good lower than the Cournot model would predict, but no lower than marginal cost

The threat of entry will drive the price below marginal cost

The price will be the same as predicted by the Cournot model unless the potential entrants actually enter the market

2. Suppose that consuming cigarettes creates a negative externality through second hand smoking. The marginal external cost created by second hand smoking is a constant (i.e. it does not vary with the level of consumption). If demand for cigarettes is lower in 2020 than in 2010, but supply factors are the same, then the optimal Pigouvian tax on cigarettes is:

Group of answer choices

The same in both years

Higher in 2020 than in 2010

Lower in 2020 than in 2010

3. Suppose that gasoline and motorbikes are complementary goods. Analyzing the two markets in general equilibrium, if the supply of gasoline decreases, then:

Group of answer choices

The price of gasoline will increase by more than we would predict in a partial equilibrium analysis

The price of gasoline will increase by less than we would predict in a partial equilibrium analysis

The price of gasoline will increase by exactly the same amount as we would predict in a partial equilibrium analysis

Answer 1

Ans 1: The price will be the same as predicted by the Cournot model unless the potential entrants actually enter the market (The price will change only when the new firms enter the market that drives up the supply and decreases the price level. The new firms will increase the degree of competition also which forces the price to decreae).

Ans 2: Lower in 2020 than in 2010 (since the demand for cigrattes has decreased and so the private equilibrium quantity has decreased now and becomes closer to socially optimal quantity, so a lesser tax is imposed now to equate it to socially optima quantity of smoking).

Ans 3: The price of gasoline will increase by less than we would predict in a partial equilibrium analysis