Market Failure & Government unit test
A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.
Negative externality
Coase theorem
Regressive tax
Pigouvian tax
Public good
Private good
Marginal private cost vs marginal social cost
Gini coefficient
Marginal vs average tax rate
Adverse selection
Deadweight loss from a negative externality
Asymmetric information
Short answer 1. Define or explain: Marginal private benefit vs marginal social benefit
3 ptsShort answer 2. Define or explain: Proportional tax
3 ptsShort answer 3. Define or explain: Moral hazard
3 ptsShort answer 4. Define or explain: Club good
3 ptsFree response
10 ptsThis course has no free-response prompt tagged to this unit, so one from elsewhere in the course is used. It is still worth writing — the skill transfers.
LONG FREE-RESPONSE. Vantis Pharmaceuticals holds a patent and is the sole seller of a medication. Market demand is P = 120 − 2Q, and the firm’s marginal cost and average total cost are both constant at $40 per unit.
Draw a correctly labeled graph showing the demand, marginal revenue, and marginal cost curves for Vantis.
Calculate the profit-maximizing quantity and price, showing your work.
Calculate the firm’s economic profit.
Calculate consumer surplus at the monopoly price.
Identify the allocatively efficient quantity and explain why the monopoly outcome is not allocatively efficient.
Calculate the deadweight loss and shade it on your graph.
Suppose a regulator imposes a price ceiling of $40 per unit. Explain the effect on quantity, on economic profit, and on deadweight loss.