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Part A: Respond to the following questions in your own words. Your responses should include specific examples and should incorporate concepts and terms from Chapters 4, 5, and 6 in your textbook.
1. In 2010 American Electric Power (AEP), an electric utility with operations from Texas to Michigan, produced 206 million megawatt-hours of electricity (a megawatt-hour measures the output of an electricity-generating plant). The company also had 1 9,000 U.S. employees. What is the average product of AEP?
2. Think about a Starbucks coffee shop. Identify whether each of the following inputs is a fixed cost or a variable cost.
a) An espresso machine.
b) Electricity to run the machine.
c) The lease on the store.
d) Workers.
3. There are 1 5 hair salons in town, and the local haircut market is operating under conditions of perfect competition.
a) What happens to the market supply curve in the short run if one of the hair salons goes out of business?
b) What happens to the price of haircuts sold?
c) What happens to the number of haircuts sold?
4. Someone wants to open a new restaurant in town. Identify which of the following would be a barrier to entry. Explain. (LO5-3)
a) None of the available property in town is zoned for business use.
b) The price of tablecloths has risen.
c) Consumers buy only from businesses they know.
d) The town requires all businesses to pay a hefty annual permit fee.
e) The town requires new businesses to pay a hefty permit fee
5. The local government needs to replace all its traffic signals. Two companies are competing for this business. Company A spends $1 00,000 on buying a new, more efficient machine to make traffic signals. Company B spends $1 00,000 on campaign contributions for the city council. (LO6-3)
a) If Company B wins the contract, is this an example of perfect competition, market power, rent-seeking behavior, or monopoly?
b) Is Company B likely to charge a higher or a lower price for the traffic signals than Company A?
c) Would the taxpayers of the town prefer that Company A or Company B win the contract? Would the city council prefer that Company A or Company B win the contract?
6. In 2008 Mayor Michael Bloomberg proposed congestion pricing for New York City streets. Congestion pricing, in its simplest form, means that cars and trucks entering a specific highly congested area of Manhattan would have to pay an extra charge—perhaps as much as $8—during peak morning and evening rush hours. The proposal was approved by the New York City Council but turned down by the New York State Legislature.
a) Does this proposal rely on the idea of public goods, externalities, regulation, or redistribution?
b) Show the effect of the congestion tax on a supply–demand diagram.
c) Whom would it hurt, and whom would it help?
d) Under what conditions is a congestion tax a good idea?
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