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
(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 (interms 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? Thegovernment? Certain people? Luck? Are you content with where you have placed us?Assuming that our markets are reasonably efficient could you draw an Edgeworth Boxthat shows where you think the two classes of consumers lie?(2)In lecture I mentioned Merit Goods. Can classical concerts public art and other publiclyprovided services be justified using the idea that merit goods are simply good for thecommunity?(3)Name and defend four reasons why might government intervention be needed in amarket?(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 theconsumption of a product X MUST decrease welfare in the market even if all of the tax isgiven back to the people in the form of a cash payout. Show as well that if thegovernment is simply interested in raising money it is better off taxing products whosedemand curves are relatively steep.(5)Now here is a problem to work through. If you really understand it you will have a firmgrasp of the ideological justification for a free market exchange economy withoutovernment intervention.•••There have two consumers You and MeThere are two goods being produced by the private sector firms X and YThere are two factors of production used my firms L and KOkay:Using the usual graphs of microeconomic analysis (e.g. budget lines and indifferencecurves isoquant curves and production functions the Edgeworth Box contract curve and the Production Possibility Schedule or Frontier for the economy) work through thesteps to SHOW that in a competitive equilibrium for a two consumer two-good and twofactor market the conditions under which:Maximum welfare is achieved (supply equals demand-consumers maximize satisfactionand 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 ANDequal to the MRT of the production possibility curve.When you have done this you should be able to understand that in a free exchangemarket for a PRIVATE GOOD in equilibrium MRS (of consumer #1) = MRS (ofconsumer #2) = MRT (the marginal rate of transformation). That is the opportunitycosts between the two good X and Y in our HEADS is the same as the costs implicatedby the society as a whole in terms of the market prices.PS: when all this happens you are maximizing consumer and producer surplus andtherefore total welfare in the market. If all markets work this way you maximize welfarein the total economy!(6)Why do we say that the Second Fundamental Theorem of Welfare Economics helps tojustify governmental attempts to alter income distribution with tax and spend policies aslong as markets can work normally once the tax and spend policies are in place?HW 9IntroductionWhat we see in the case of monopoly power is that the theory really addresses the issueof market power.
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