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Question 1 (a)

  • Profit-maximizing point

Demand = Marginal Social Benefit Average Total Cost Marginal Cost — -o OUTPUT QIQ2 Q3Q4 Marginal Revenue

Question 1 (c)

  • Economic profit = Total revenue - Explicit costs - Implicit costs.

  • If the firm earns zero economic profit, the accounting profit is positive.

Question 1 (f)

  • Suppose the long-run average total cost is strictly downward sloping. Would it be efficient to build a second bridge? Explain.

    • One point is earned for stating that building a second bridge would be inefficient and for explaining that, because there are economies of scale, building a second bridge would raise the average total cost.

Question 2 (b)

  • The law of diminishing returns

    • As more and more units of a variable input are added to a fixed input, the output increases at a decreasing rate.

In economics, diminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant. Diminishing returns - Wikipedia

  • Diminishing returns occur because of the overuse of the fixed input.

Question 3 (a)

  • Elasticity and tax

Inelastic Demand 2. Buyer's Tax Incidence Supplier's Tax Incidence Buyer's Tax Incidence Supplier's lax Incidence 8 4 3. st Buyer's Tax Incidence Supplier's Tax Incidence Quantity Inelastic Supply st s Buyer's Tax Incidence Supplier's Tax Incidence 8 8 Q Q Quantity Elastic Demand s Quantity Elastic Supply st s Quantity

. Inelastic Demand 3. Elastic Supply 2. 4. Elastic Demand Inelastic Supply

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