Chapter 6 – Markets, Maximizers, and Efficiency

Concept Problems

1. Selecting the quantity of an activity at which marginal benefit equals marginal

cost maximizes the net benefit of the activity.

2. A maximizing decisionmaker will increase the quantity up to the point at which

MB = MC.

3. The total benefit curve would slope upward at a diminishing rate, reach a

maximum, and then slope down (most sports experts agree that too much

training reduces performance). If your objective is to maximize sports

performance, you would pick the hours of practice at which the total benefit curve

reaches a maximum.

4. The point of this question is to get students thinking about different kinds of

objectives. The minister or rabbi might seek to maximize the size of his or her

congregation (or staff or total revenues); the senator might seek to maximize his

or her probability of reelection; the manager to maximize the team’s winning

percentage; the owner will simply maximize profits; and the director of the charity

is likely to seek to maximize total revenue collected.

5.

a. No one owns clean air; therefore, there is no exchange between polluters and

those affected by the pollution. The result is excessive pollution of a common

property resource. The achievement of cleaner air is, therefore, a problem for

public policy.

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b. Rights are exclusive and transferable; there is no obvious problem of public

policy.

c. Rights are exclusive and transferable. Many people regard decent housing as

a public policy problem, however, because some individuals cannot afford it.

d. Exclusive, transferable rights to hunt whales do not generally exist or are not

recognized by all nations. They are a common property resource and are, as a

result, in danger of extinction.

6. Because dry-cleaning establishments are not faced with the external costs of

their pollution, the price is probably lower and the output higher than would be

economically efficient.

7. Of course the cost of the fees would be passed on; that is a desirable market

response. We want consumers to be faced with prices that fully reflect the costs

of their choices. Consumers of dry-cleaning services should confront the cost of

the pollution that these services generate. The higher price will reduce

consumption and thus reduce pollution.

8. Although the benefits of inoculation are partly private, there are also

significant external benefits. If fewer people contract such diseases, fewer

people will be exposed to them. A reduction in the number of disease-carrying

people is a kind of public good.

9.

a. Libraries could clearly practice exclusion, and the marginal cost of an

additional user is positive. They are not public goods.

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b. Although the direct benefit of having the fire department stop a particular fire in

a building is private, the existence of such a service makes all of us safer from

fires on a nonexclusive basis. It is in large measure a public good.

c. Although network programs are broadcast on a nonexclusive basis, it would

not be prohibitively costly to practice exclusion. Indeed, most programming is

now carried by cable operators who charge a fee. Network programs are not

public goods.

d. Exclusion can be practiced and the cost of an additional user is positive. Save

for the case of communicable-disease prevention, health-care is not a public

good.

e. Water is exclusive and the cost of adding another consumer is positive; it is

not a public good.

10. When herds are large enough to permit hunting, more hunters will pay for

the opportunity to hunt. The village will thus profit by preserving its elephants.

The ban on ivory sales reduces the potential return from legal killing of elephants

and thus reduces the value of licenses. It thus reduces the incentive to preserve

elephants on Botswana and other countries that use marketable licenses as an

incentive to preserve their herds.

11. Fish are a common property resource. As was the case with the buffalo, no

fishing fleet has an incentive to restrict its own activity to preserve the population

of fish, and as a result, fish populations are declining rapidly. Seafood prices

have risen sharply as a result of reduced supply.

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Numerical Problems

1.

a.

Hours 0 1 2 3 4 5 6
spent
studying
Total 0 100 180 240 280 300 300
benefit
Marginal \/ \/ \/ \/ \/ \/
benefit 100 80 60 40 20 0

Total 50 100 150 200 250 300 350

cost

Marginal \/ \/ \/ \/ \/ \/
cost 50 50 50 50 50 50

b. The sum of the three rectangles for 1, 2, and 3 hours of study equals the total

benefit of 3 hours, 240.

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c. The sum of the three rectangles for 1, 2, and 3 hours of study equals the total

cost of 3 hours.

d.

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e. The marginal benefit and marginal cost curves intersect at 3 hours of study,

the solution that maximizes Joe’s net benefit.

2.

a.

b. Given the higher marginal cost of study, Joe will maximize his net benefit by

reducing his hours of study to 2 hours.

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3.

a. The equilibrium price is $2.50 per gallon and the equilibrium quantity is 3

million gallons of gasoline per month.

6-3 a&b Gasoline Market

$4.50
$4.00
Supply
$3.50
Consumer
$3.00
Price per gallon

surplus
$2.50
Producer
$2.00 surplus
$1.50
Demand
$1.00
$0.50
$0.00
0 1 2 3 4 5 6
Gallons of gasoline per month (in millions)

b. The area of consumer surplus is the area below the demand curve and above

a horizontal line at the equilibrium price, $2.50. Producer’s surplus is the area

above the supply curve and below the horizontal line at $2.50

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c.

6-3 c Gasoline Market

Supply + tax
$4.00

Consumer
surplus Supply
$3.00
Price per gallon

$2.75

Producer
$2.00 surplus

Demand
$1.00

$0.00
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
Gallons of gasoline per month (in millions)

d. The new equilibrium price is $2.75 per gallon, and the equilibrium quantity falls

to 2.5 million gallons of gasoline per month.

e. The price rises by less than $0.50, because the demand curve is downward

sloping.

f. If the demand curve were perfectly inelastic (i.e. a vertical line), the price would

rise by $0.50.

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4.

a. The equilibrium price is $20 per vaccination, and the equilibrium quantity is

70,000 vaccinations per month.

6-4a Vaccination Market

$60

$50
Price per vaccination

$40

$30

Supply
$20

$10 Demand

$0
0 10 20 30 40 50 60 70 80 90 100
Vaccinations per month (in thousands)

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b. Consumer surplus is given by the area under the demand curve and above a

horizontal line at a price of $20 per vaccination. Producer surplus is the area

above the supply curve and below a horizontal line at a price of $20 per

vaccination.

6-4b Vaccination Market

$60

$50
Price per vaccinations

$40
Consumer
surplus
$30

Supply
$20

Producer
$10 surplus Demand

$0
0 10 20 30 40 50 60 70 80 90 100
Vaccinations per month (in thousands)

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c. The supply curve shifts downward by the amount of the subsidy. The supply

curve thus shifts downward by $10.

6-4 c&d Vaccination Market

$60

$50
Price per vaccination

$40
Consumer
$30 surplus
Supply
Supply +
subsidy
$20
$15
Producer
$10
surplus Demand

$0
0 10 20 30 40 50 60 70 80 90 100
Vaccinations per month (in thousands)

d. The equilibrium price falls to $15 per vaccination, and the equilibrium quantity

rises to 80,000 vaccinations per month.

e. The price does not fall by the full amount of the subsidy because of the

downward slope of the demand curve.

f. Total spending on vaccinations equals $1,200,000 per month.

g. The subsidy equals $800,000 per month.

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5.

a.

6-5a Apple Market

$2.50

$2.00

Supply
Price per pound

$1.50

$1.25

$1.00

$0.50 Demand

$0.00
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Pound of apples per month

b. The equilibrium price is $1.25 per pound, and the equilibrium quantity is 6,000

pounds per month.

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c.

6-5b Apple Market

$2.50

$2.00
Supply
Price per pound

Consumer
$1.50 surplus

$1.00 Producer
surplus
Demand

$0.50

$0.00
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Pounds of apples per month

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