This set uses fictional firms and towns. It covers private and external costs, under-consumption, public goods, information failure and neutral policy comparison. Questions run from easier to harder.
Try each on paper first, with units, then open the answer. Money is in RM. The mistake log and retest queue is a good place to record every slip.
Questions
Q1. A fictional bakery pays RM 800 a week for flour and RM 400 for rent. Its machines wake the neighbours early. Which of these are private costs and which is an external cost?
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Flour (RM 800) and rent (RM 400) are paid by the bakery, so they are private costs. The neighbours’ lost sleep is borne by third parties who are not paid, so it is an external cost.
Q2. Sungai Cerah Printing has private costs of RM 12,000 for a run. It causes RM 3,000 of harm to nearby shops. Find the social cost and the external cost as a percentage of the social cost.
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Social cost = 12,000 + 3,000 = RM 15,000. External share = 3,000 ÷ 15,000 = 20%.
Q3. A fictional orchard owner keeps bees, which help the neighbouring farm’s fruit trees. The neighbouring farm does not pay. Is this an external cost or benefit, and who bears or receives it?
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It is an external benefit. The neighbouring farm receives it and pays nothing.
Q4. In a fictional town, bicycle repair workshops have MPB = 80 − Q and MC = 10 + Q. Q is sessions per week and money is RM per session. Each session gives RM 10 of external benefit. Find the market quantity, the social optimum and the under-consumption.
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Market: 80 − Q = 10 + Q, so 2Q = 70 and Q = 35. Social: MSB = 90 − Q. 90 − Q = 10 + Q gives 2Q = 80, so Q = 40. Under-consumption = 40 − 35 = 5 sessions.
Q5. In Q4, what is the welfare gain from moving from the market quantity to the social optimum?
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At Q = 35, MSB = 55 and MC = 45, a gap of 10. The gap falls to 0 at Q = 40. Gain = ½ × 5 × 10 = RM 25 per week.
Q6. Test each as a public good, stating the result of both tests: (a) a village flood siren, (b) a toll bridge, (c) a bowl of noodles at a stall.
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(a) Non-excludable and non-rival: public good. (b) Excludable (pay to cross) and, unless crowded, non-rival: not a public good because it fails the first test. (c) Excludable and rival: private good.
Q7. A flood siren costs RM 9,000. There are 150 households, each valuing it at RM 80. (a) Is it worth providing? (b) What equal share covers the cost? (c) If only 90 households pay that share, is the cost met?
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(a) Total benefit = 150 × 80 = RM 12,000 > RM 9,000, so yes. (b) 9,000 ÷ 150 = RM 60. (c) 90 × 60 = RM 5,400, which is less than RM 9,000, so the cost is not met. This is the free-rider problem.
Q8. In a fictional market for used laptops there are 50 good ones worth RM 3,000 to a buyer and 50 poor ones worth RM 1,000. Buyers cannot tell them apart. (a) What is the average value? (b) Owners of good laptops need at least RM 2,400. What happens?
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(a) (50 × 3,000 + 50 × 1,000) ÷ 100 = RM 2,000. (b) RM 2,000 is below RM 2,400, so good-laptop owners withdraw. Only poor laptops remain, and buyers’ offers fall towards RM 1,000.
Q9. Two students explain the laptop problem. Student A says, “Sellers are lying.” Student B says, “Buyers cannot check quality, so they offer the average.” Which fits the model, and why?
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Student B. The model rests on asymmetric information, not on dishonesty. Student A adds a motive that is not stated.
Q10. A fictional market has demand P = 70 − Q and private MC = 20 + Q. External cost is RM 8 per unit, so MSC = 28 + Q. Find (a) the market quantity and price, (b) the social optimum, (c) the effect of a tax of RM 8 per unit and the tax revenue.
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(a) 70 − Q = 20 + Q, so Q = 25, P = 45. (b) 70 − Q = 28 + Q, so 2Q = 42 and Q = 21, P = 49. (c) A tax of 8 gives supply 28 + Q, so the market settles at Q = 21, buyers pay RM 49 and the seller receives 49 − 8 = RM 41, which equals private MC at 21 (20 + 21 = 41). Revenue = 8 × 21 = RM 168. The welfare gain is ½ × 4 × 8 = RM 16.
Q11. Using the bicycle workshops in Q4, a fictional subsidy of RM 10 per session lowers the workshops’ costs to MC = Q. Find the new quantity, the price buyers pay and the cost to the subsidy payer. Then write one neutral sentence about the result.
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80 − Q = Q gives Q = 40, equal to the social optimum. Buyers pay RM 40. Workshops receive 40 + 10 = RM 50, which equals the original MC at 40 (10 + 40). Cost = 10 × 40 = RM 400. Neutral sentence: “In this model, a RM 10 subsidy brings quantity to 40 at a cost of RM 400, and the model assumes the external benefit is known and constant.”
If you got these wrong
- Q1 to Q3 (sorting costs and benefits): reread separating private from external costs. Check you named who bears the cost.
- Q4, Q5 and Q11 (curves and under-consumption): reread explaining under-consumption in a stated model. Check you used MSB for the social optimum, not MPB.
- Q6 and Q7 (public goods): reread interpreting a public-good example. Run both tests, one at a time.
- Q8 and Q9 (information): reread describing information failure. Use the average, then ask who leaves.
- Q10 and Q11 (policy comparison): reread comparing modelled policy effects neutrally. Name the aim and the assumption.
Return to the module overview for the study order. For personal feedback on your working, see online one-to-one Economics tuition. The percentage-base explorer and ratios tool can help check the figures.