Final Exam Student Name

Final Examstudent Name

Final Examstudent Name

FINAL EXAM Student Name: Date: 1. Suppose the government imposes the following production tax on one perfectly competitive firm in an industry: For each unit the firm produces, it must pay $1 to the government. Will consumers in this market end up paying higher prices because of the tax? Why or why not? (3-4 sentences answer; max. 4 points) 2. Is there a deadweight loss if a firm produces the quantity of output at which price equals marginal cost? Explain. (2-3 sentences; max. 2 points) 3. Fast-food stores often charge higher prices for their products in high-crime areas than they charge in low-crime areas. Is this an act of price discrimination? Why or why not? (5-8 sentences; max. 8 points) 4. Will there be profits in the long run in a monopolistically competitive market? Explain your answer. (3-4 sentences; max. 4 points) 5. How are oligopoly and monopolistic competition alike? How are they different? (5-8 sentences; max. 8 points) 6. Compare the U.S. income distribution in 1967 with the income distribution in 2019. Has U.S. income inequality increased or decreased? What percentage of total money income did the top fifth of U.S. households receive in sentences: max. 8 points) Extra Credit 7. The desire for profit can end up pushing countries toward producing goods in which they have a comparative advantage. Do you agree or disagree? Explain your answer. (3-4 sentences; max. 4 points) Do not send this final exam by email. You must upload it before 12:05 pm in Assignments’’ section under D2L . Note: Please do not copy and paste your answers from other sources. Also do not use the same examples, stories, or explanations as your classmates. Any communication between classmates during the exam counts as academic misconduct.

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Paper For Above instruction

Understanding the Economics of Taxation, Market Structures, and Income Inequality

The provided final exam questions delve into critical aspects of economic theory and policy, specifically focusing on taxation, market efficiency, pricing strategies, and income distribution. These questions require comprehensive understanding and analysis of how government policies influence market outcomes, the nature of competition, and the dynamics of income inequality in the United States. Addressing these questions involves synthesizing economic principles with real-world applications, and providing well-reasoned arguments supported by credible economic theories and empirical data.

Question 1: Impact of Production Tax on Consumers

When a government imposes a per-unit tax on a perfectly competitive firm, the immediate impact is on the firm's marginal cost, which increases by the amount of the tax. In a perfectly competitive market, firms are price takers, meaning they accept the market price determined by overall supply and demand. As the firm's cost rises, the supply curve shifts upward, leading to a higher equilibrium price for consumers. Consequently, consumers end up paying a higher price for the product because the tax is effectively passed on through increased prices, although the extent of the pass-through depends on the elasticities of demand and supply. In most cases, consumers bear a significant portion of the tax burden, especially if demand is relatively inelastic compared to supply.

Question 2: Deadweight Loss at Equilibrium

There is no deadweight loss when a firm produces at the point where the price equals marginal cost because this condition signifies allocative efficiency. At this equilibrium, resources are allocated optimally, and the total welfare — combining consumer and producer surplus — is maximized. Deadweight loss occurs when the quantity produced is either less than or more than the efficient level, typically due to taxes, price controls, or other market distortions. Therefore, producing where price equals marginal cost results in an efficient outcome with no deadweight loss.

Question 3: Price Discrimination in High-Crime Areas

Charging higher prices in high-crime areas is a form of geographic price discrimination, a type of third-degree price discrimination. This practice involves segmenting markets based on location and charging different prices based on willingness or ability to pay in different areas. The justification often lies in higher operating costs, perceived risk, and different demand elasticities across locations. Businesses in high-risk areas may charge higher prices to compensate for increased security expenses or to capture more consumer surplus in segments with inelastic demand. While this can be considered price discrimination, it is often scrutinized for ethical concerns and legal implications, especially if it involves unfair treatment or exploitation of vulnerable communities.

Question 4: Long-Run Profits in Monopolistically Competitive Markets

In the long run, profits in a monopolistically competitive market tend to diminish to zero due to the entry of new firms attracted by short-term profits. The presence of differentiated products and free entry and exit create a situation where firms can only cover their average total costs in equilibrium. Marginal revenue equals marginal cost, and the price tends to equal the average total cost, leading to normal profits. Therefore, while firms can enjoy short-term profits, the competition erodes these profits over time, resulting in zero long-run economic profits.

Question 5: Similarities and Differences between Oligopoly and Monopolistic Competition

Oligopoly and monopolistic competition are both market structures with imperfect competition, but they differ significantly in their characteristics. Both markets feature some degree of product differentiation; however, oligopolies tend to have few large firms dominating the industry, leading to interdependence where each firm considers the actions of others in strategic decision-making. In contrast, monopolistically competitive markets have many firms, each offering differentiated products, and entry and exit are relatively free. Pricing strategies differ as well: oligopolists may collude or compete fiercely, with strategic behavior such as price wars or collusion, whereas firms in monopolistic competition primarily compete based on product differentiation and advertising. Market power is stronger in oligopolies due to fewer competitors and higher barriers to entry, while monopolistic competition has lower barriers and more frequent entry and exit, leading to less market concentration.

Question 6: Income Inequality in the U.S. (1967 vs. 2019)

Comparing the U.S. income distribution in 1967 and 2019 reveals a significant increase in income inequality over time. In 1967, income distribution was more balanced, with the top fifth of households receiving a smaller percentage of total income. By 2019, the top fifth garnered a disproportionately large share—approximately 53-55%—reflecting a widening wealth gap. This increased inequality is attributed to factors such as technological change, globalization, tax policy shifts favoring the wealthy, and declining union influence. These trends highlight the growing concentration of income among the wealthiest households, raising concerns about economic mobility and social equity in the United States.

Extra Credit: Profit Motivation and Comparative Advantage

I agree that the pursuit of profit can drive countries to produce goods in line with their comparative advantages. Economies naturally tend to specialize in industries where they have relative efficiency, leading to greater overall productivity and economic growth. This specialization encourages countries to allocate resources more efficiently, benefiting from trade by exporting goods they produce relatively cheaply and importing goods where they are less efficient. However, national strategic considerations and political factors can sometimes influence production choices beyond pure profit motives, but fundamentally, profit incentives align with the theory of comparative advantage and promote international efficiency.

References

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2. Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
3. Krugman, P., Obstfeld, M., & Melitz, M. J. (2018). International Economics: Theory and Policy (11th ed.). Pearson.
4. Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.
5. Case, K. E., Fair, R. C., & Oster, S. M. (2017). Principles of Economics (12th ed.). Pearson.
6. Stiglitz, J. E. (2012). The Price of Inequality: How Today's Divided Society Endangers Our Future. W.W. Norton & Company.
7. Harford, T. (2015). The Undercover Economist Strikes Back. Little, Brown.
8. Friedman, M. (2002). Capitalism and Freedom. University of Chicago Press.
9. Weitzman, M. L. (2014). Can Negotiation Damage Our Economy? Journal of Economic Perspectives, 28(2), 195-212.
10. OECD. (2019). Income inequality. OECD Publishing. https://doi.org/10.1787/4dd50c09-en