1. (6 points) Social supply and demand
2. (2 points) Does the community demand curve slope down? Even with diminishing marginal utility for the individual, the community demand curve may not be downward sloping. People may conclude that Beyonce's duck is good because others are eating in her restaurant (information). People may enjoy eating in the restaurant only if other people are there (network effects). People may value her restaurant more because it is expensive (status effects).
3. Draw a demand curve for her restaurant under assumptions of information, network effects, status effects. Do you still have a downward sloping demand curve? Do you necessarily have an equilibrium price and quantity where demand equals marginal cost?
4. If demand curves slope up, will there be an equilibrium between supply and demand?
6. (2 points) Can a perfectly competitive business survive? Before a single plane was built, Boeing spent as much as $50 billion on the 787 Dreamliner. Planes can then be made at relatively low cost.
7. If Boeing sells planes at marginal cost, will it be able to recoup its investment?
8. If companies that invest in fixed costs cannot survive, can we have a productive economy?

1. (2 points) If practice makes perfect, do supply curve slope up? As Adam Smith had predicted, most production processes are characterized by learning by doing with increasing efficiency over time and with the experience. In the production of liberty ships during World War II, for example (see the graph to the left), the labor required to build a ship fell by as much as two thirds over less than four years because experience allowed workers and engineers to become better at building ships and to figure out better ways to organize production.
2. Draw a marginal cost curve for a firm where productivity increases with output. Do supply curve slope up?