(5) A free rider enjoys the benefits of a good or service without paying for it. The free-rider problem is that the economy provides an inefficient small quantity of a public good.

(1) In a perfectly competitive market, the process of entry and exit will end when price equals minimum marginal cost.

(2) An example of adverse selection is man who tries to sell his used car without disclosing that it needs a new transmission.

(3) In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current profits by producing more. Use the following table to answer question (4) and (5). Listed in the table are the long-run total costs for two firms. 

(4) Firm 1 is experiencing constant returns to scale.

(5) Firm 2 is experiencing constant returns to scale.

(1) Suppose that an increasing-cost industry is currently in long-run equilibrium. The market price is $200, and there are 50 firms in the industry. In the short run, the number of firms will equal 50, but in the long run, the number of firms will increase.

(2) AAA company produces and sells computers. The firm has determined that if it hires 5 workers, it can produce 12 computers per week. If it hires 6 workers, it can produce 15 computers per week. It sells each computer for $500, and it pays each of its workers $800 per week. For the 6th worker, the marginal profit is $1,500.

(3) Jack and Rose are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on radio, each will earn a profit of $6,000. If neither advertises at all, each will earn a profit of $9000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other will earn $5,500. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $10,000 and the other will carn $3,000. If one advertiscs on radio and the other does not advertise, then the one advertising on radio will earn $11,000 and the other will earn $5,000. If both follow their dominant strategy, then Jack will advertise on radio and earn $6,000.

(4) A tax on a market with elastic demand and elastic supply will shrink the market more than a tax on a market with inelastic demand and inelastic supply will shrink the market.

(5) If the price elasticity of demand for a good is 0.8, then a 4 percent decrease in the quantity of the good demanded might result from a 3.2 percent increase in the price of the good.

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