<p>Blazer, don’t obsess. You still get partial credit for answers even if you don’t have every step. Micro answers, as requested (I could tell you macro too – maybe later – but I’m lazy now):</p>
<p>1:
a) draw standard side-by-side graphs (firm = price taker, show price firm at min ATC, Q firm set @ MR = MC, Q/P industry @ intersection, etc)
b) Reduce ATC but leave MR/MC unaffected. Number of firms in industry is the same b/c firms cannot enter/exit in SR. Profits increase b/c subsidy is good for firm. Like many things in Economics, the quantity of output is arguable and we will see what Collegeboard says. Either: a) supply and demand did not shift, MR did not change, and hence output unchanged, or b) supply shifted to the right because input costs decreased, MR therefore decreased (firm = price taker), and hence output for the firm decreased b/c Q set @ MR = MC and MR decreased while MC was the same. Please note that a LUMP-SUM tax/subsidy CANNOT increase MR; it can be thought of as a decrease in total costs or increase in total revenues but never as a change in the marginal unit.
c) SR Profits -> Entry -> S to right. Hence # firms increase, P decreases, output increases.</p>
<p>2:
a) marginal utility = additional utility (measured in utils) from one additional unit of X
b) Fudge MU/$ = 12/2 = 6 utils/$ > coffee = 20/4 = 5 utils / $ so more fudge and less coffee to maximize total utility.
c) Elasticity of demand = % change in Q/ % change in P = 0/k = 0. Seller will pay none and consumer will pay all of tax (because consumer is “indifferent” to price increases consumer will theoretically spend an infinite amount and is willing to pay the tax)</p>
<p>3:
a) draw standard graphs. An effective ceiling is below the equilibrium level and leads to a shortage.
b) set Q @ MR = MC for profit maximization so Q1 and set Q @ P = MC for AE (allocative efficiency) so Q3
c) Making a profit equal to TR – TC = P1P3DF box</p>