Introduction to Micro Econ
MGT 405
1. (10 pts) Because a government subsidy increases the number of mutually beneficial trades, it increases social welfare.
Uncertain. A Subsidy is like an inverse tax. Consumers and producers benefit. The demand curve shifts down shifting the equilibrium, lower price for consumers and greater quantity sold for producers. Consumer surplus rises and producer surplus rises (area under the new price they receive). However the welfare is the sum of the new consumer surplus and the producer surplus, minus the government’s expenses. Depending on how much the government is spending to subsidies this industry, the effect on welfare may be negative or positive.
2. (10 pts) A tax reduces welfare less than a quota because it does not prevent the market from reaching equilibrium.
False. A new Equilibrium is reached with both a tax and a quota. A tax causes the price to rise and the quantity supplied to decrease, as does a Quota. The decrease in Welfare defined as the total surplus depends on the tax and quota being compared. Both a Quota and a Tax lead to higher prices and less of the good being produced and purchased. The Dead Weight Loss for each could be the same.
3. (5 pts) A technology shift that reduces costs will cause total surplus to fall if there is a sufficiently large reduction in producer surplus
True – Total Surplus equals Consumer Surplus plus Producer surplus. If a technology shift causes producer surplus to fall then the total surplus will all as well.
4. (10 pts) if a firm lays off workers during a recession, its marginal product of labor will increase.
Uncertain.
The firm could be laying off workers as a result of decreased production resulting from the recession. This change in production corresponds to a change to a lower isoquant , Q`<Q, and the marginal product of labor will remain unchanged.
On the other hand, demand for the product may be the same but the firm is trying to cut back costs. In this case the
1. (10 pts) Because a government subsidy increases the number of mutually beneficial trades, it increases social welfare.
Uncertain. A Subsidy is like an inverse tax. Consumers and producers benefit. The demand curve shifts down shifting the equilibrium, lower price for consumers and greater quantity sold for producers. Consumer surplus rises and producer surplus rises (area under the new price they receive). However the welfare is the sum of the new consumer surplus and the producer surplus, minus the government’s expenses. Depending on how much the government is spending to subsidies this industry, the effect on welfare may be negative or positive.
2. (10 pts) A tax reduces welfare less than a quota because it does not prevent the market from reaching equilibrium.
False. A new Equilibrium is reached with both a tax and a quota. A tax causes the price to rise and the quantity supplied to decrease, as does a Quota. The decrease in Welfare defined as the total surplus depends on the tax and quota being compared. Both a Quota and a Tax lead to higher prices and less of the good being produced and purchased. The Dead Weight Loss for each could be the same.
3. (5 pts) A technology shift that reduces costs will cause total surplus to fall if there is a sufficiently large reduction in producer surplus
True – Total Surplus equals Consumer Surplus plus Producer surplus. If a technology shift causes producer surplus to fall then the total surplus will all as well.
4. (10 pts) if a firm lays off workers during a recession, its marginal product of labor will increase.
Uncertain.
The firm could be laying off workers as a result of decreased production resulting from the recession. This change in production corresponds to a change to a lower isoquant , Q`<Q, and the marginal product of labor will remain unchanged.
On the other hand, demand for the product may be the same but the firm is trying to cut back costs. In this case the