Question

1. Answer each of the following statements True/False/Uncertain. Give a full explanation of your answer. A fully labeled graph is a welcome addition to any answer (if applicable), though it is not necessary.                                                                                                

A) In the short-run, average variable cost converges to average total cost as output increases.

B) The tragedy of the commons states that individuals will overproduce a common                       resource.

C) When evaluating social welfare, a government must take a subjective stance on what constitutes welfare.

D) Absent government intervention, a perfectly competitive market maximizes total surplus.

2. Consider a perfectly competitive market with demand Q=1,000-4P. The marginal cost for each firm in the market is constant at MC=4.

1. Determine the competitive equilibrium price and quantity. .
2. Graph demand, supply, and the equilibrium found in part A).
3. Determine consumer surplus, producer surplus, and total surplus.
4. Is consumer surplus or producer surplus equal to zero? Why or why not?
5. Is this question representative of a long or short-run perfectly competitive market? How do you know?

Answer 1