Question

(a) True or False: One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.

(b) True or False: The more price elastic the demand curve, the more a competitive market will over-produce (relative to the efficient level) in the presence of a negative externality.

(c) Consider two types of rules that might govern an otherwise unregulated health insurance market: (1) Insurance companies can price-discriminate against the sick and old; (2) insurance companies cannot price discriminate against the sick and old. Explain why, in equilibrium, insurance may be very expensive for the sick and old regardless of which case we find ourselves in

(d) Towards the end of WWII, many factories in Germany were bombed by the Allies. Explain what this means in the context of the Solow model. If nothing else had changed, how would this have affected the growth rates and the steady-state level of standard-of-living?

(e) The Gini coefficient for before-tax income in country X is 0.30, and for after-tax income it is 0.35. How do you interpret this?

Answer 1

(a) One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists. FALSE

(b) The more price elastic the demand curve, the more a competitive market will over-produce (relative to the efficient level) in the presence of a negative externality. TRUE

(c) In the first case, insurance companies would price-discriminate against the sick and old, this will leave the sick and old with high insurance rates. In the second case, insurance companies offer health insurance at a single zero profit price, but that might cause the young and healthy to not buy insurance, which in turn means the zero profit price will have to rise, eventually leading to only the old and sick buying insurance at a high rate.