Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

348 FINAL EXAMINATION
simultaneously. Is Pareto optimum sufficient to define the maximum social welfare for this society?
(b) Explain why with constant returns to scale and the absence of externalities and public goods a
Pareto optimum point will not be attained if there is imperfect competiton in some product or factor
market. (c) Why would.the existence of externalities and public good prevent the achievement of
Pareto optimum?
Optional
Answers
1. (a) The best, or optimum, level of output of the firm is OM, and P x ¼ SM, AC¼ RM, AVC ¼ NM, AFC ¼ RN,
profit per unit is SR, and total profits are (SR) . (OM). In the long run, more firms (attracted by the profits) will
enter the industry until all firms just break even.
(b) The shut-down point is F. The firm’s short-run supply curve is given by FKSZ. The industry’s short-run
supply curve (in the absence of external economies or diseconomies) is obtained by the horizontal addition
of all firms.
2. (a) In Fig. F-2, the monopolistic firm originally (i.e., before the tax) produces output OF (given by the intersection
at point G of the firm’s MR curve and original MC curve). At output OF, P ¼ EF, AC¼ HF, and the
monopolist’s profits are EH per unit and (EH) . (OF) in total.
A per-unit tax is like a variable cost, and as such, it causes the monopolist’s MC and AC curves to shift up
by the amount of the per-unit tax. Suppose that the marginal and average cost curves shift up from MC and AC
to MC 0 and AC 0 , respectively, in the figure. Then the monopolist will produce only OF 0 (given by the intersection
at point G 0 of the monopolist’s MR curve and new or MC 0 curve). At output OF 0 P 0 ¼ E 0 F 0 ,
AC 0 ¼ H 0 F 0 , and the monopolist’s new profits are E 0 H 0 per unit and (E 0 H 0 ) . (OF 0 ) in total. Thus, profits
per unit are reduced from EH to E 0 H 0 , and total profits are reduced from (EH) . (OF) to(E 0 H 0 ) . (OF 0 ).
However, the monopolist is able to shift part of the burden of the tax to consumers in the form of higher
prices and lower output. That is, part of the vertical shift (which represents the size of the per-unit tax) in
the monopolist’s MC and AC curves is paid by the consumer to the extent of the increase in the product price.
Fig. F-2
3.
(a)
Since cost curves probably differ under various forms of market organization, only a few generalizations can
be made. First, the perfectly competitive firm and the monopolistically competitive firm break even when the
industry is in long-run equilibrium. Thus, consumers get the commodity at cost of production. On the other
hand, the monopolist and the oligopolist can and usually do make profits in the long run. These profits,