Carlos Graterol

September 14, 2008

Exercise 2

1. Returns to scale are increasing, because ATC is decreasing, MC is

less than ATC.

2. A. 4000 b. $10.00 c. $12.00 d. $2 per 1,000 gallons

3. A. 2000 b. $20.00

4. Less than

5. 200

6. 400

7. $2,000

8.)Complete the following statement: With a positive externality or

external benefit, marginal socialbenefit at each quantity is (greater
than) marginal private benefit, and the
private equilibrium quantity is (less than) the socially efficient quantity.

9.) 4 Hours

10.) 2 Hours

11.) 2 Hours

12.) Complete the following statement: With a negative externality or external cost,
marginal social cost at each quantity is (greater than, equal to, less than) marginal
private cost, and the private equilibrium quantity is (greater than, equal to, less than) the
socially efficient quantity.

13.) They are alike in the sense that the same principle applies for both answers. An
individual agent will acquire something if MB=MC, and the social cost will have no
bearing on what the individual will do. When the good is beneficial to society as a
whole, it is not used at the efficient quantity because the individual’s usage of the good
will not be enough to be at the efficient point of society; when the good has negative
externalities that do not cost the individual anything, the good will be oversupplied and
the good will not be produced at the efficient quantity.
Graph

Graph
Graph ForRecreational Activities.