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1. P & L is a profit-maximizing shirt-manufacturing firm. The firm can sell all the shirts it can produce to retailers at a price of

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1. P & L is a profit-maximizing shirt-manufacturing firm. The firm can sell all the shirts it can produce to retailers at a price of $20 each. P & L can hire all of the workers it wants at a market wage of $120 per day per worker. The table below shows the firm's short-run production function. Number of Number of Workers Shirts per Day 0 0 10 25 45 4 60 72 80 85 82 (a) In what kind of market structure does this firm sell its output? How can you tell? (b) In what kind of market structure does this firm hire its workers? How can you tell? (c) Calculate the marginal revenue product of the third worker. Show your work. (d) How many workers should the firm hire to maximize profit? Explain. . Petsall Corporation is a profit-maximizing monopolist. It sells a patented rabies vaccine for pets and earns economic profits. (a) Draw a correctly labeled graph that shows each of the following for Petsall. (i) Output and price of the vaccine (ii) Area of economic profits (b) Assume that Petsall hires its production workers in a perfectly competitive labor market at the wage rate of $20 per hour. (i) State the marginal conditions for hiring the profit-maximizing amount of labor. (ii) Draw a correctly labeled graph that shows the labor supply and demand curves for Petsall and indicate the profit-maximizing quantity of labor. (c) Suppose that the market wage rate now falls to $15 per hour. Show on your diagram in (b) (ii) how each of the following would be affected. (i) The supply of labor to Petsall (ii) The amount of labor Petsall would hire (d) Given the lower wage rate in (c), indicate how each of the following would change. (i) Total fixed cost (ii) Marginal cost (iii) Price of the productExternalities Practice Price Key Concepts: Marginal Social Benefit (MSB): overall benefits to ALL of society, including consumers and third parties Marginal Social Costs (MSC): overall costs to ALL of society, including producers and third parties Marginal Private Benefit (MPB): determines the demand, consumers are willing to purchase a product based on its private benefits specifically to them. Marginal Private Costs (MPC): determines the supply, producers are willing and able to produce only according to their specific marginal costs. Positive Externality, or Marginal External Benefit (MEB): spillover benefits to someone other than the buyers of the good. External benefits to a third-party. Negative Externality or Marginal External Cost (MEC): spillover costs to someone other than the producers of the good. External costs to a third party. Allocationficient (Socially Optimal): occurs when the market is producing the exact quantity that society wants, based on where MSB=MSC (which is usually where supply crosses demand, unless there is an externality.) Market Failure: occurs when the correct quantity that society wants is not met. Usually caused by an externality. Causes DWL Formulas to Know: 1. MSB = + the positive externality 2. = MPC + the negative externality 3. If there is no externality: MSB = MPB = Demand 4. If there is no externality: MSC = MPC = Supply 5. Positive Externalities cause DWL due to 6. Negative Externalities cause DWL due to 7. As long as MEB & MEC equal _ the market quantity will be socially optimal. 8. A positive externality is calculated by the (vertical, horizontal) difference between the D and MSB and is measured in (dollars, units of quantity). Externality Examples: For each of these activities, explain whether there is a positive or negative externality. 9. Private high school education 10. Smog from an electric power plant 11. Your neighbor's yappy dog 12. Pre-kindergarten measles vaccinations 13. Your dad's blasts his favorite music as you try to study 14. Streetlights 15. Cigarette smoking in a public placePrice MSC Answer the following questions using the graph to the left: S = MPC 1. This a market has a (positive, negative) externality equal to $( P3 2. This market is (overproducing, underproducing) by the amount of P4 3. What quantity would society want this market to D = MSB = MPB produce? Also, shade in the area of DWL. P5 4. This market could be fixed by a per-unit Q1 Q2 Q3 Quantity (tax or subsidy) in the amount of $C 5. What is a real-world example of this type of externality? (Be creative- not from class!) 6. What real-world solution could be taken to help correct the market failure caused by the problem in your example above? Be specific. Answer the following questions using the graph to the left: Price 7. This a market has a (positive, negative) externality equal to $ J. P1 8. This market is (overproducing, underproducing) by the amount of C P3 9. What quantity would society want this market to MSB produce? Also, shade in the area of DWL. 10. This market could be fixed by a per-unit (tax or subsidy) in the amount of $( Q1 Q2 Q3 Quantity 11. What is a real-world example of this type of externality? (Be creative- not from class!) 12. What real-world solution could be taken to help correct the market failure caused by the problem in your example above? Be specific

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