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Describe the difference between marginal cost and average total cost.

Answer in 1-2 paragraphs.

  1. Some people have suggested that forced population control is an efficient means of reducing the Tragedy of the Commons associated with our clean air and water resources. Provide an argument that would support this theory and also an argument that would oppose this theory. Then provide another possible solution that would rely on market mechanisms.
  2. Describe the difference between marginal cost and average total cost. Why are both of these costs important to a profit maximizing firm?

Answer in 1-4 sentences.

  1. Imagine you are on vacation in Russia. Suddenly you are arrested and accused of spying for the US. (You are innocent) Your captors inform you that if you confess you will receive a prison sentence of 2 years while your coconspirator (you never heard of them) will receive 25 years. If you both confess you will each receive 5 years. You are also told that your coconspirator is being offered the same option. If you both maintain your innocence there’s not enough evidence to convict either of you. Applying economic theories to the problem, what should you choose to do and why?
  2. A hotel owner having heard that new hotel plans to open in the area. He says “we have too many hotels in town already. Statistics show that vacancy rates are 20% on any given night.” Assuming that is correct, evaluate his negative assessment of the situation in terms of business stealing and product variety externalities.
  3. Explain the theory that education acts as a signaling device. How does this contrast to the theory that education as an investment in human capital?
  4. Explain the difference between inferior goods and normal goods. As a developing economy experiences increases in income (measured by GDP) what do you predict will happen to the demand for inferior goods?
  1. Describe why a consumer who chooses a consumption bundle in which the relative price exceeds the marginal rate of substitution cant be at an optimum.

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