ECNS 202 PRINTOUT
8th Edition
ISBN: 9781337096584
Author: Mankiw
Publisher: CENGAGE L
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Question
Chapter 7, Problem 5QR
To determine
The two types of market failures and how they cause market to fail.
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1. After the reopening of borders with mainland China following the COVID-19 lockdown, residents
living near the border now have the option to shop for food on either side. In Hong Kong, the cost
of food is at its listed price, while across the border in mainland China, the price is only half that
of Hong Kong's. A recent report indicates a decline in food sales in Hong Kong post-reopening.
**
Diagrams need not be to scale; Focus on accurately representing the relevant concepts
and relationships rather than the exact proportions.
(a) Using a diagram, explain why Hong Kong's food sales might have dropped after the border
reopening. Assume that consumers are indifferent between purchasing food in Hong Kong or
mainland China, and therefore, their indifference curves have a slope of one like below.
Additionally, consider that there are no transport costs and the daily food budget for consumers
is identical whether they shop in Hong Kong or mainland China. I
3.
14
(b) In response to the…
2. Health Food Company is a well-known global brand that specializes in healthy and organic food
products. One of their main products is organic chicken, which they source from small farmers
in the area. Health Food Company is the sole buyer of organic chicken in the market.
(a) In the context of the organic chicken industry, what type of market structure is Health Food
Company operating in?
(b) Using a diagram, explain how the identified market structure affects the input pricing and
output decisions of Health Food Company. Specifically, include the relevant curves and
any key points such as the profit-maximizing price and quantity. ()
(c) How can encouraging small chicken farmers to form bargaining associations help improve
their trade terms? Explain how this works by drawing on the graph in answer (b) to
illustrate your answer.
2. Suppose that a farmer has two ways to produce his crop. He can use a low-polluting
technology with the marginal cost curve MCL or a high polluting technology with the
marginal cost curve MCH. If the farmer uses the high-polluting technology, for each unit of
quantity produced, one unit of pollution is also produced. Pollution causes pollution
damages that are valued at $E per unit. The good produced can be sold in the market for $P
per unit.
P
1
MCH
0
Q₁
MCL
Q2
E
a.
b.
C.
If there are no restrictions on the firm's choices, which technology will the farmer use and
what quantity will he produce? Explain, referring to the area identified in the figure
Given your response in part a, is it socially efficient for there to be no restriction on
production? Explain, referring to the area identified in the figure
If the government restricts production to Q1, what technology would the farmer choose?
Would a socially efficient outcome be achieved? Explain, referring to the area identified in…
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