Page 893 - Krugmans Economics for AP Text Book_Neat

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SOLUTIONS TO AP REVIEW QUESTIONS

if my use of the public tennis court prevents your use of Tackle the Test:
the same court. In this case the public space becomes a Multiple-Choice Questions
common resource.
b. A cheese burrito is both excludable and rival in consump- 1. e
tion. Hence it is a private good. 2. b
c. Information from a password-protected web site is exclud- 3.
able but non rival in consumption. So it is an artificially b
scarce good. 4. c
d. Publicly announced information about the path of an 5. c
incoming hurricane is nonexcludable and non rival in
consumption, so it is a public good. Tackle the Test:
2. A private producer will supply only a good that is exclud- Free-Response Questions
able; otherwise, the producer won’t be able to charge a 2.
price for it that covers the cost of production. So a pri- Antitrust policy: prohibit practices that create monopolies
and break up existing monopolies.
vate producer would be willing to supply a cheese burrito
and information from a password-protected website but Public ownership: have government operate the monop-
oly with the goal of efficiency rather than profit.
unwilling to supply a public park or publicly announced
information about an incoming hurricane. Price regulation: restrict price to the lowest price that
does not cause losses, which is the price at which the
Tackle the Test: average total cost curve intersects the demand curve.
Multiple-Choice Questions
1. a Module 78
2. b Check Your Understanding
3. e 1. The poverty threshold is an absolute measure of poverty.
4. d It defines individuals as poor if their incomes fall below a
5. e level that is considered adequate to purchase the necessi-
ties of life, irrespective of how well other people are
Tackle the Test: doing. And that measure is fixed: in 2009, for instance, it
took $10,956 for an individual living alone to purchase
Free-Response Questions the necessities of life, regardless of how well-off other
2. a. Nonrival in consumption: the same unit of the good can Americans were. In particular, the poverty threshold is
be consumed by more than one person at the same time. not adjusted for an increase in living standards: even if
Nonexcludable: suppliers of the good can’t prevent people other Americans are becoming increasingly well-off over
who don’t pay from consuming the good. time, in real terms (that is, in terms of how many goods
b. The additional cost is zero. Public goods are nonrival, so an individual at the poverty threshold can buy) the
the same unit can be provided to additional community poverty threshold remains the same.
members at no added cost. Tackle the Test:
Multiple-Choice Questions
Module 77 1. a
Check Your Understanding 2. b
1. a. This practice would be illegal because it constitutes a 3. e
tying arrangement. 4. c
b. This practice would be illegal because it constitutes exclu- 5.
sive dealing. a
c. This is legal because the merger does not lead to monopo- Tackle the Test:
lization.
d. This practice would be illegal because it is a collusive Free-Response Questions
2.
agreement to restrain trade. (Answers to the first part of the question will differ.)
2. Wind energy is created by a natural monopoly, which Economics can add to our knowledge of the facts regard-
means that marginal cost is below average total cost in ing trade-offs involved in implementing government pro-
grams to redistribute income. However, economics can’t
the relevant range of production. (If fact, the marginal resolve differences in values and philosophies.
cost of wind energy is virtually zero, because the wind
itself is free.) Thus, a requirement to charge a price equal Module 79
to marginal cost would result in a price below average
total cost and cause the firm to incur a loss. Only with Check Your Understanding
subsidies could the firm survive with marginal cost pric-
ing. If policymakers chose average cost pricing instead, 1. The inefficiency caused by adverse selection is that an
the operator of the wind farm would make a normal insurance policy with a premium based on the average
profit and no subsidy would be necessary. risk of all drivers will attract only an adverse selection of