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Part II – Short Answer:  Total 30 points, 5 points per quest…

Part II – Short Answer:  Total 30 points, 5 points per question.  Answer 6 of the questions below (there are six boxes below for each answer): Suppose the government in response to angry voters during the summer imposes a price ceiling on cold beverages of $1.00 per can.  However, the market price is $2.00 per can.  What would you expect the outcome to be?  In the short run, under what conditions should a firm produce if its price is below average total cost? What are the conditions that it should not produce?  Explain your reasoning. Describe the law of diminishing marginal returns (product). How does that relate to cost? How would a firm seeking to maximize profits price its services. Is there a difference between this for a competitive and monopoly market? (Consider marginal revenue and price) Explain positive and negative externalities. A public good is non-rival and non-excludable. Define these terms and discuss how this could be considered a market failure. Ford Motor Company made headlines in 1914 by offering autoworkers $5 per day, up from $2.50 per day. The wage payment was newsworthy because the typical market wage in manufacturing at that time was just $2 to $3 per day. What was Ford’s rationale for offering a higher-than-competitive wage and how did he believe that this would improve his business. (Hint – think about value marginal product) You are responsible developing pricing strategy for a major company. You learn that one your products has an inelastic demand and the other has an elastic demand.  In order to increase revenue what changes to pricing would you propose.  Explain your reasoning. The value of marginal product is determined by two factors. What are they? How does this explain why the Michael Jordan of curling, the winter Olympic sport, earns less than a NBA player? Who are the winners and losers under tariffs?  (there are three)    

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