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Economics Homework-8




Question;(1);If you were to examine where the USA might be on its Utility;Possibilities Curve, which, say, shows a trade-off in Utility between;the Rich and the Poor sections of society (in terms of what each sector;consumes), where do you think we would lie on the curve? Given your;opinion, who do you think placed us where we are on the curve? The;government? Certain people? Luck? Are you content with where you have placed us?;Assuming that our markets are reasonably efficient, could you draw an;Edgeworth Box that shows where you think the two classes of consumers;lie?;(2);In lecture I mentioned Merit Goods. Can classical concerts, public art;and other publicly provided services be justified using the idea that;merit goods are simply good for the community?;(3);Name and defend four reasons why might government intervention be needed in a market?;(4);Here is sort of a repeat question from an earlier homework/discussion;for emphasis. Using the usual supply and demand curves (lines) please;show how a tax on the consumption of a product X MUST decrease welfare;in the market even if all of the tax is given back to the people in the;form of a cash payout. Show as well that if the government is simply;interested in raising money, it is better off taxing products whose;demand curves are relatively steep.;(5);Now here is a problem to work through. If you really understand it, you;will have a firm grasp of the ideological justification for a free;market exchange economy without overnment intervention.;? There have two consumers, You and Me;? There are two goods being produced by the private sector firms, X and Y;? There are two factors of production used my firms, L and K;Okay;Using the usual graphs of microeconomic analysis (e.g. budget lines and;indifference curves, isoquant curves and production functions, the;Edgeworth Box, contract curve, and the Production Possibility Schedule;or Frontier for the economy), work through the steps to SHOW that in a;competitive equilibrium for a two consumer, two-good, and two-factor;market the conditions under which;Maximum welfare is achieved (supply equals demand-consumers maximize satisfaction and producers minimize costs).;That is: show how;(a) each of the MRSs between the two goods of the two consumers are equal;(b) the MRS of each consumer is equal to the price ratios of the two goods;(c) each of the MRSs is equal to the ratio of the MCs of producing the;two goods, AND equal to the MRT of the production possibility curve.;When you have done this, you should be able to understand that in a free;exchange market for a PRIVATE GOOD, in equilibrium, MRS (of consumer;#1) = MRS (of consumer #2) = MRT (the marginal rate of transformation).;That is, the opportunity costs between the two good X and Y in our;HEADS is the same as the costs implicated by the society as a whole in;terms of the market prices.;PS: when all this happens, you are maximizing consumer and producer;surplus, and therefore total welfare in the market. If all markets work;this way, you maximize welfare in the total economy!;(6);Why do we say that the Second Fundamental Theorem of Welfare Economics;helps to justify governmental attempts to alter income distribution with;tax and spend policies as long as markets can work normally once the;tax and spend policies are in place?


Paper#55615 | Written in 18-Jul-2015

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